Up and Down

This stat from @SentimentTrader blew me away:

“The S&P 500 fund, SPY, has been up at least 0.5% for 5 straight days. That’s tied for the longest streak since its inception.”

I wasn’t taken aback because of how strong the markets have been recently, but that streak of five days sounded really small to me. I almost couldn’t believe it was right. But after looking at the data, the shock wore off.

The S&P 500 has gained >0.5% on 28% of all days (going back to 1993), so the likelihood of this happening 5 straight days is ~0.05%, or once every 2,000 days.

The other times this happened was 2011, 2009, 2008, and twice in 1999. With such a small sample size, there is no reason to think we know what happens next, but one thing that we know for sure is that all of these streaks occurred during periods of above average volatility.

Vol exploded on the way down and naturally has subsided on the way up. Although the market isn’t as chaotic as it was in the first quarter, you may be surprised to learn that the market is still swinging around more than it usually does.

The average absolute rolling 20-day change of the S&P 500, which for all intents and purposes is the same thing as standard deviation, hasn’t been below 1% since the end of February. For context, the median is 0.66%.

Investors have calmed down much more than the market has. The reason for this, stating the very obvious, is that volatility feels much better on the way up then on the way down.

As I’m writing this, the streak has ended, but the large swings continue. Stocks fell more than 1% today.

One of the silver linings to volatile markets is that they force us to learn or relearn our true tolerance for risk. And even if you’ve invested through periods like this before, sometimes we need a reminder of what risk feels like. 2020 has delivered this in spades.