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One Eye on Statistics, The Other On Risk

Below are two statistical maps, one of 5% moves in the NASDAQ and the other in the S&P 500.

As far as 10%, we are not very extended. There have been plenty of times when we had much longer upward trends without interrupting declines greater than 10%. We have currently gone approximately 166 days since our last 10% or greater correction (using NASDAQ). This is not outside the norm.

However, when looking at 5% corrections, we are at an extended position. For NASDAQ, there have been 15 occurrences where it rose for more than 124 days without a 5% correction. The ensuing correction after these periods was an average of 11.2% (median 11.1%) lasting 31 days (median 40 days). Also, of those 15 corrections, 9 were greater than 10%, and only 1 was greater than 20% (September 13, 1978).

As far as market moves in general, looking at 5% moves or greater, the average NASDAQ move is currently 16.9% lasting 42 days. We are currently at 34.7% lasting 124 days. Looking at the outer edge of probability, 2 standard deviations away from both, our mean advance and our mean number of days to advance, we arrive at an extended danger zone of 42.9% or 142 days. We passed intial risk zone (1 standard deviation, which is where I start to lower position size and portfolio risk slightly) at 29.9% and 92 days.

While these are just statistics, and won't tell us what will happen, they do give us some idea of how the market acts. Key take away, we are in the range of being ready for a correction, but most likely not a market top.

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