SPX Biggest Drop of 2012 So Far… the Series in Historical Context
6 March Sets New 2012 Bear Record on SPX, INDU
We have just seen the biggest daily decline of the year so far on US equity indexes. It is less dramatic than it sounds, because January and February were months of extremely low volatility and there were no daily drops exceeding 1 percent on the indexes. In fact, the biggest close-to-close decline since start of 2012 had been:
- -0.69% on Friday 10 February on the SPX
- -0.76% on Wednesday 15 February on the Dow
That is history now, as SPX lost 1.54% and Dow Jones lost 1.57% on Tuesday. There were 45 trading days without a daily decline bigger than -0.69% on SPX and bigger than -0.76% on the Dow. The series started on 29 December 2011.
This low volatility series wasn’t left unnoticed by blogs and media, nor will its end. However, if we look at it from a perspective of longer history, we will see that there is nothing that special about it – and the length of the series is far from historical records (set mainly in the 1960’s).
Long Series of Days without Big Drops in History
Note: I haven’t looked at intraday volatility – only at close-to-close price changes.
Since 1957 (the introduction of S&P500 Index), there have been 19 occasions when the index didn’t have a single daily decline exceeding -0.70% for 45 or more consecutive trading days (including the series that just ended). The longest series was 103 days and ended on 24 April 1964 (but the decline was only -0.78%). Interestingly, SPX continued more or less sideways for more than 2 months after the end of this record series.
There have been 47 occasions of 45+ consecutive trading days without declines exceeding -1% since 1957. The longest was 174 trading days, ending on 21 November 1963 with a decline of -1.30% (and -2.81% the day after).
Dow Jones Industrial Average
Let’s also look at the Dow Jones Index, which has much longer history (it started in 1896, but I only have data since 1900). There have been 32 occasions when the index went for 45 or more trading days without a decline exceeding -0.77%. The longest series had 136 trading days (that’s more than half a year) and ended on 1 February 1966. In this case, 2-3 weeks of sideways market followed, but in the end the Dow lost 4% in the month (21 trading days) following the end of the series. However, the decline on 1 February 1966 was only -0.77% and if it didn’t count, the series would be 150 trading days, ending on 21 February 1966 (-0.90%).
There have been 79 occasions of 45+ trading days without declines exceeding -1% since 1900. The longest was 155 trading days (the same series as above, ending on 1 March 1966 with a decline of -1.44%).
Is There Any Directional Bias Now?
Of course we have bearish technicals, we have Greece, and we have high implied volatility premium and VIX contango. But from a strictly historical perspective – looking at the average performance following the end of such series in the past, there is no significant directional bias. On many occasions in the past, the end of a series was followed by another series or sideways market. Overall, no difference from the long-term average performance for any period from 1 day to 3 months on.
Needless to say, the 1960’s (when many of the longest series took place) were quite a different market from the one we have now and this simple analysis is just for fun rather than anything else.