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Sep 5, 2017

S&P Drift: Slow and Gentle

By:Sage Anderson

The Fast and the Furious film franchise introduced the world to "drifting," a stunt driving technique that involves intentional oversteering and tractionless turning.

For many of us, the sight of Vin Diesel and Paul Walker weaving their way through city streets, gunfire, and police cruisers will be forever etched in our memory banks under the topic heading: "drift."

No matter how vivid those images might be, the "drift" file in every trader’s brain should also include an entry related to the behavior of equity markets.

In the stock market, positive drift is a term that refers to the gradually rising nature of stock prices over time. While the film series captured the dynamic nature of “drift” street racing, a recent episode of Market Measures focuses on this phenomenon from a trading perspective.

And while many of us don't have the skill or inclination to drift a tricked-out Nissan Z around a burning barrel in LA, a solid understanding of this trading concept may have valuable and practical application in your investment portfolio.

Looking at any historical chart of the S&P 500, it’s accurate to characterize the meandering, upward trajectory like a turtle climbing a hill. And while the description “slow and gentle” may not sell movie tickets, those are the exact words that premium sellers generally like to hear about the underlying market.

The graphic below presents a summary of the daily movements in the S&P 500 since 1950:

The statistics above support the notion of positive drift, as the S&P 500 has experienced more up days than down days over the last 67 years. Obviously, the S&P 500 has also steadily risen over time, which is another verification of positive drift.

The slide above also shows that fear can be a more powerful force than greed, given that the maximum drop in the S&P 500 is larger than the maximum gain. This data helps us understand why skew is observed in the pricing of options. Skew is the phenomenon that helps explain why puts trade richer than calls (on average).  

The balance of the episode dices historical data from the S&P 500 to a much greater degree, and we think reviewing the information is worth a few moments of your time.

In particular, the Market Measures team examines the number of instances the market has moved in one direction over a specific number of days. For example, the S&P 500 has moved down 2 days in a row on 2000+ occasions since 1950. However, it has only moved down for 12 consecutive days on one occasion during that same period.

Notably, the S&P 500 since 1950 has never moved down for 13 consecutive days or more.

While the information included in this episode gets very granular, a comprehensive understanding of how equity market’s move may elevate your comfort level while trading. And by removing a portion of mystery from the market, you might in turn be able to trade more systematically, and less emotionally.

We hope you’ll take the time to review the complete episode of Market Measures focusing on positive drift when your schedule allows.

As always, we encourage you to follow-up with any comments or questions at

Thanks for reading!

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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