Tuesday, October 7, 2008

Who Bravely Dares Must Sometimes Risk a Fall

Yesterday we detailed how a spike in the VIX has historically presented a buying opportunity. Today, we'll analyze what to expect from this past month's historic collapse.

Over the last month (defined below as every 22 trading days to account for the different length of a month), the S&P 500 has lost almost 15% of its value. Of the past 14,282 one-month rolling periods (going back to 1950) this is the 34th worst period (only 0.2% were worse)! We've finally seen short-term investors running for the hills and Cramer invoked even more fear among his boo-ya viewers telling them:

"Whatever money you may need for the next five years, please take it out of the stock market. Right now. This week. I do not believe that you should risk those assets in the stock market."
For the record, if you NEED a certain amount money in any five year period... do NOT EVER invest it all in equities. Not sure why Cramer didn't relay this bit of advice to his viewers BEFORE the recent 40% drop, but I digress...

So with Cramer thinking Armageddon and EVERY contrarian investor drooling over Cramer's comments, we ask... how have equities performed after similar five day periods of (under)peformance?

Looking at the data all the way back to 1950, equity markets have actually done quite well, returning more than 15% over the ensuing 12 months following a similar one month drop.

Again, while I am not bullish on equities as the economy still has a lot of unwinding to do (and lets not forget that whole frozen credit market thing), I will keep an eye out for buying opportunities in select names (i.e. canned food and taser companies).

Quote: Tobias Smollet


  1. Your chart is clearly questionable: how is it that stock prices never experienced decline in any scenario along the X-axis?

  2. those are averages for each scenario. of course there were individual times when stock prices experienced declines