Conditional Probabilities

I got caught up in the quiet hysteria of noticing that the S&P500 has not had a down day of greater than -1% since October 11th. Tomorrow will mark three months since; that seems like a long time. In fact I made reference to it in a tweet before I ran over to my spreadsheet to put the study into the context or perhaps view it through the perspective of whether or not the market is in a bullish or bearish phase, which I like to define as residing above or below its 200-day simple moving average (sma).

My spreadsheet goes back to January 7, 1988, or 7,312 trading days. My first glance of -1% down days revealed 894 occurrences, or ~31 per year. From the first glance is seems like we are well overdue for another occurrence. But then I remembered the criteria of where the market resides in relation to its 200-sma. Here’s a nice little table that shows the relationships:

above/below 200sma all days -1% days % occurrences
above 200sma 5,368 407 7.58%
below 200sma 1,944 487 25.05%
7,312 894

As with all things, context is important. If we’re looking for a -1% down day and the S&P500 is above its 200-sma, we’re only likely to see ~19 of them per year, but on the flip side, or better said, the “underneath side of the 200-sma,” we’re likely to see a -1% down day every fourth trading day, or ~62 times per year. The S&P500 is currently above its 200-sma and has been since June 28th of last year.

Stay safe out there.