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ONE OUTLIER TO ANOTHER – THE MARKET IS NOW AT AN EXTREME

2 November 2009 by Cullen Roche 3 Comments

I ran across this great chart at The Sudden Debt Blog.  It shows just how extreme the performance of the last 12 months has been.  Not only did we overshoot the mean to an extreme March low, but we’re now sitting at an outlier point in terms of 6 month returns.  While this mean reversion doesn’t necessarily mean the market will fall substantially, it is safe to assume that returns going forward will be nowhere near as high as they have been over the last 6 months:

One immediate observation is that the market has just swung from one near record (-40%) to another (+40%) between March and September 2009. Since 1871, only the Great Depression era exhibited greater swings in share prices.

  • How unusual is such an event, from a statistical standpoint? Let’s look at the next chart, a familiar distribution histogram (click to enlarge). The median 6-month performance is +3.1% (the mean is 2.7%) and the standard deviation around it (known as sigma, denoted by the Greek letter “σ”) is 12.2%.

sigma

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Comments
  • Van

    as Mark Twain said…history may not repeat, but it often rhymes…

    11/02/2009 at 6:42 AM
  • Nick

    The market rally is now approximately 8 months old. Since 1970 if you look at all rolling 8 month periods there are only 2 time periods when the market did better: 1975 and 1983. Contrary to my expectations the market was up over the foll 12 months. Only 2 data points is not conclusive, but still interesting.

    11/02/2009 at 7:08 PM