HedgeFundLIVE.com — One of the main arguments for why I am longer term bearish is that I don’t feel that the correction we had from late February to mid March was large enough. Given the mess overseas and the current macroeconomic picture, which is far from pretty, I believe a larger correction is in order. A close to close reading on the ES shows that we had a 6.6% correction.
Then, much to the chagrin of the bears, the market rallied back quickly, 4.5% over the course of seven trading days with little to no pause. In my attempt to hard code this scenario into my usual market model, I calculated 17D changes (the duration of our latest pullback) and looked for 17D changes less than 6% (again, we saw a 6.6% correction). Then, I calculated the subsequent 7D change (the duration of our rally thus far) and looked for these next 7D changes greater than 4% (again, we have rallied 4.5% from the low close). This type of bounce following a down move has occurred 58 times since 2000, or 2% oft he time.
As usual, in efforts to derive some tradable value from this study, I examined the subsequent 5D, 10D, and 20D changes to help gain colour that might back my thesis on the market. The odds of being up in the next 5, 10, and 20 days are roughly 50%, which is an outcome of these models quite often.
5D 10D 20D Pullback (17D) -6.00% Rally (7D) 4.00% Next Time Period Pct Chg 0.00% 0.00% 0.00% Number of Instances 58 Number that Meets Criteria 33 32 32 Probability of Up >0% Next Time Period 56.90% 55.17% 55.17%When I get these 50/50-ish odds, I like to look at summary stats for the actual returns. Below shows the average, median, max, and min stats for the per cent changes for the subsequent 5, 10, and 20 days:
Subseq. 5D Chg Subseq. 10D Chg Subseq. 20D Chg Average -0.27% Average -0.62% Average -0.24% Median 0.51% Median 0.34% Median 0.45% Max 7.92% Max 10.08% Max 13.44% Min -15.72% Min -26.64% Min -28.69%The downside risk appears greater, which is expected, as evidenced by the max vs. the min numbers. The averages should be weighed down by this downside risk, so I will look more to the median changes, which show up small (30-50bps, I’ll call it).
Click Here for full article.