Saturday, August 13, 2011

For The History Books: Unprecedented Market Action

The market has been extremely wild to say the least. I will admit, it punished me hard. Going through such challenging period makes you reflect and question some things. I question the trading decisions I've made. I question my trading system and its ability to handle such a volatile period. I question my own sanity at times. But since I am writing this post, it means I am not dead. And since I'm not dead, this experience can only make me STRONGER.

I got slaughtered the past couple weeks, and I wonder: could I have planned or anticipated this better?  At this point, I'm not really sure yet. But when I look at the market stats from the last week, I realize it is hard to plan for things that have never happened before. That's still no excuse, but here are some items to reflect on.

- S&P Downgrades US Debt: NEVER HAPPENED! This is what I call a BLACK SWAN.

- Dow Jones Ind. 4 straight days of 4% moves: This has only happened 5 other times in history. November 2008, the 1987 Crash, then the 1929 - 1932 period. Rare indeed!

- Dow Jones Ind. 4 straight days of 400 point moves: NEVER happened. Granted it is all relative to the actual balance of the index. But still...

NYSE McClellan Oscillator (ratio adjusted): On 8/8/11, it hit -142.58. It has only been below -140 7 other times, the last being the 1987 crash.

Nasdaq McCLellan Oscillator (ratio adjusted): On 8/8/11, it hit -118.82 This is the first time it has been below -118 since the 1987 crash period. It hit below -140 on the crash day.

Zweig Breadth Indicator: It hit a low of 27.03 this week. It is a breadth overbought/oversold measure. It hasn't been this low since November 2008, one random day in 1990, then 1987 crash. Pretty rare.

NYSE Advance / Decline Volume: 90% up/down 4 straight days in row. If you take the NYSE volume of advancing issues compared to the volume of declining issues you get this indicator. We have NEVER had 4 90% days (up or down) in row ever. This lets you know how 'one way' the market has been, in either direction.

$SPX down over 13% in 5 days: Last time it happened was Oct/Nov 2008, 1987 crash, then 1940. Not a regular occurrence.

VIX 74% above its 10 day SMA: NEVER been this high. The day after the Flash Crash it was 67% over the 10 SMA.

VIX moved up 105% in 3 days: NEVER happened. The previous 3 day record was 80% in 2007.

VIX up 50% in one day: Only 5 other times in history.

*** Follow Sentiment Trader on Twitter and you will learn more. Here are some of his tweets from this week. Let that perspective soak in:

"Today has seen the widest-ever range in the NYSE TICK indicator (per Bloomberg data). From -1538 to +1560. $$"

"The only other times the a/d line has been this skewed were 5/13/40 and 5/21/40. Yeah, 70 years ago.$$"

"Nasdaq up/down volume on pace for worst reading ever (dating to 1984). The 2nd-worst reading was last Thursday.$$Don't have final figures yet, but this may be the worst-breadth day in history (since '40). 66 stocks down for every 1 up. $$"
"VIX jumps >30% twice in a week. The only one i show is 10/19/87."

This was no garden variety pullback. Most indicator extremes can only be compared to previous crash periods (2008, 1987, 1929). When indicators get this extreme, they basically loose all meaning. I think it is safe to say that we just went through one of the craziest periods in market history!

There are lessons to be learned. I just need to clearly identify these lessons and create an action plan to address them. I hope you all can do the same.

Good trading.


Woodshedder said...

Great post!

Emil said...

I think I experienced the same phase as you. My mean reversion models started to put me heavily long as the market dropped and soon I found myself in the largest draw-down I've ever had.

I don't think it's possible to ever filter out these events as the are so unexpected and unusual. Any stop system will leave some money on the table as the number of times it works are so few relative to the times it don't. I think the best way to cope with this drastic slides in the market is simply to survive them and go on trading after they occur.

Good Night!

Chris said...


Thanks for the comment. I agree with you all the way. This was a very heavy drawdown for mean-reversion traders. Survive and move forward.


SnapTrader said...

Great post Chris. I have been traveling and am just catching up on some blog reading. This one has been tough for mean-reversion traders. As we've discussed via email, if we believe in our approach we have to suck up the loss and work it back.

I've worked through many filters for this kind of thing in the past, and virtually all of them seem to cause more harm than good over the long haul. I guess we can scream a collective "OUCH!" and move on.


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