With the S&P 500 down almost 7% over the last couple trading days, the topic of market corrections seems both timely and relevant for consideration by the tastytrade community.
Earlier this year, tastytrade put the spotlight on the subject of market corrections on Market Measures and now we help put the current market volatility in context with a review of this episode.
Tom Sosnoff and Tony Battista kick off that show by voicing their observation that the last couple years seem to have been characterized by fewer market corrections than usual.
Following what has essentially become tastytrade standard operating procedure, they decided to put that particular observation under the microscope. Specifically, they tasked the tastytrade research team with the following question:
The results from this analysis are quite interesting and help add context to the current pullback in global equity markets.
To answer the question, the tastytrade team defined "corrections" as 5% or 10% pullbacks (tested independently) and then analyzed the frequency of these corrections over the last 20 years in the S&P 500. This involved counting the number of days it took for the SPX to correct 5% and 10% from the peak of its most recent rally.
In order to answer the question about recent market activity versus the past, the research team then separated the results into two categories: corrections that occurred from 1995 to 2011 and corrections that occurred from 2012 to present. This left four groups of data, 5% corrections from 1995-2011, 10% corrections from 1995-2011, 5% corrections from 2012 to present, and 10% corrections from 2012 to present.
The results of this study are depicted below and are presented by the number of corrections per year and degree of pullback:
As the above data indicates, the number of corrections per year in both the 5% and 10% category have been significantly reduced in the last couple years when compared to the previous 18 years. Furthermore, the piece of data that really sticks out is the "average days between corrections" for 10% corrections in the 2012 to present category.
As of March 16, 2015, that streak stood at 697 days, which is considerably longer than the average days between 10% corrections during 1995 to 2011, which was only 88. This is especially pertinent right now as that streak has been officially broken with the S&P's slide on August 24, 2015 which put the S&P down roughly 11% from the latest peak.
At the time this episode aired, Tom and Tony weighed in on the results by suggesting that based on the last 20 years of data, one would expect to see some normalization in terms of the number of corrections per year and the length in between them going forward.
Sage words as it turns out.
We encourage you to view the entire episode of Market Measures covering market corrections for their full discussions on this very pertinent topic.
Additionally, we encourage you to leave any and all feedback below or contact us on social media with any questions or suggestions.
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