S&P 500, Dow suffer biggest weekly decline in more than 2 years. So What?

Evaluating a strategy or making a drastic decision about our portfolio, based on yesterday’s Market behavior, would be a big mistake. Possibly we have become accustomed to a market with very low volatility. But that is not normal. The market has been and is much more volatile. Even in the second part of the 90s, with a clearly rising market, the volatility was much higher than in recent years.

Regular downturns are just part of being an investor

"When the market starts tumbling as is now — especially when it’s down more than 10%—many people hit their pain threshold and start to sell they’re scared that this drop could turn into a death spiral. Aren’t they just being sensible and prudent? Actually, not so much. It turns out that fewer than one in five corrections escalate to the point where they become a bear market.

To put it another way, 80% of corrections don’t turn into bear markets. If you panic and move into cash during a correction, you may well be doing so right before the market rebounds. Once you understand that the vast majority of corrections aren’t that bad, it’s easier to keep calm and resist the temptation to hit the eject button at the first sign of turbulence.

On average, there’s been a market correction every year since 1900.
On average, there’s been a market correction every year since 1900. When I first heard this, I was floored. Just think about it: if you’re 50 years old today and have a life expectancy of 85, you can expect to live through another 35 corrections. To put it another way, you’ll experience the same number of corrections as birthdays. (Note: a correction is defined as a drop of at least 10% but not more than 20%. A bear market is a drop of more than 20%).

Why does this matter? Because it shows you that corrections are just a routine part of owning stocks. Instead of living in fear of corrections, accept them as regular occurrences. And historically, the average correction was a 13.5% decline and lasted 54 days — less than two months.

Still, when you’re in the midst of a correction, you might find yourself becoming emotional and wanting to sell because you’re anxious to avert the possibility of more pain. You’re certainly not alone. These widespread emotions create a crisis mentality. But the vast majority of the time, the sky is not falling. It is a simply a “seasonal storm.”

How bad does it get when the market really crashes? Historically, the S&P 500 SPX, -2.12% has dropped by an average of 33% during bear markets. In more than a third of bear markets, the U.S. benchmark index plunged by more than 40%. I’m not going to sugarcoat this. If you’re someone who panics, sells everything in the midst of this mayhem, and locks in a loss of more than 40%, you’re going to feel like a grizzly bear mauled you for real. Even if you have the knowledge and fortitude not to sell, you’ll likely find that bear markets are a gut-wrenching experience.

Even Vanguard Group founder Jack Bogle admits that bear markets are no walk in the park. “How do I feel when the market goes down 50%?” he asks rhetorically. “Honestly, I feel miserable. I get knots in my stomach. So what do I do? I get out a couple of my books on ‘staying the course’ and reread them!”

Sadly, many investment advisers fall victim to the same fear and hide under their desks during tumultuous times. Peter Mallouk told me that the ongoing communication during these storms is key. Here’s what you need to know: bear markets don’t last. The 14 bear markets in the U.S. over the last 70 years varied widely in duration, from a month-and-a-half (45 days) to nearly 2 years (694 days). On average, they lasted about a year.

The S&P 500 experienced an average intra-year decline of 14.2% from 1980 through the end of 2015. In other words, these market drops were remarkably regular occurrences over 36 years. Once again, nothing to be scared of — just a matter of winter putting in its usual seasonal appearance. But you know what really blows my mind? The market ended up achieving a positive return in 27 of those 36 years. That’s 75% of the time. This happened just recently when the S&P 500 sank 11% in January 2016. It then made a sharp U-turn and headed for new highs.

Why is this so important? Because it reminds us that the market generally rises over the long run — even though it hits a huge number of potholes along the way. You know as well as I do that the world had its fair share of problems over those 36 years, including two Gulf wars, 9/11, the conflicts in Iraq and Afghanistan, and the worst financial crisis since the Great Depression. Even so, the market ultimately rose in all but nine of those years.

But what if America’s economic future is lousy? It’s a fair question. We all know there are serious challenges, whether it’s the threat of terrorism, global warming, or Social Security liabilities. Even so, this is an incredibly dynamic and resilient economy with some powerful trends driving its future growth. In his 2015 annual report to Berkshire Hathaway BRK.A, -3.55% BRK.B, -3.74% shareholders, Warren Buffett addressed this subject at length, explaining how population growth and extraordinary gains in productivity will create an enormous increase in wealth for the next generation of Americans. “This all powerful trend is certain to continue: America’s economic magic remains alive and well,” he wrote. “For 240 years, it’s been a terrible mistake to bet against America, and now is no time to start.”

Understand the facts about how markets behave and take full ownership of your financial future.
So understand the facts about how markets behave and take full ownership of your financial future. You’re taking responsibility. Because you know what? Most people never take responsibility. They prefer to blame the market for whatever happens to them. But the market never took a dime from anyone.

As Buffett has said, “The stock market is a device for transferring money from the impatient to the patient.” If you lose money in the market, it’s because of a decision you made—and if you make money in the market, it’s because of a decision you made. The market is going to do whatever it’s going to do. But you determine whether you’ll win or lose. "


What’s the point of you copy and paste an article?

Easier just give us the link.

I appreciate the full story, I doubt I would’ve bothered to click on a link. My fear is the fact that this is the longest bull market in history & the last bear took 1/2 of the “buy & holders” $. Maybe it’s time to lean towards being a little more conservative… at the very least? Have you made good $ over the last 9 years? Do you want to keep it? Are you nearing retirement ( 5-10 years )?

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[The article that is attached is not an “explanation” to this statement. The article is about investing and C2 strategies are trading (and not investing) systems. So the article is totally irrelevant for us (for the C2 part of our portfolio.)]

Evaluating a strategy based on a single day / single trade is indeed a mistake, in general. However, to observe what a strategy did yesterday (or last week) can be interesting / relevant. It shouldn’t necessarily trigger stopping to trade the system, but it is an opportunity to see how the system behaves during market correction. Does it only trade the long side? Does it chase the down market and enters at each temporary (5 minute, 0.1%) uptick? Not good. If it does anyway: is it get stopped out? Or adds to losing trade? Not good. Or doesn’t apply stops at all? Not good. Does it stay in cash? Better. Does it recognize the correction and trades the short side? Even better.

To stay with a long-only trading system because on the long run, as this and countless other articles “prove” the overall market has an upward bias, is a losing proposition.

[To develop a long only system unfortunately may not be a losing proposition – during a correction / downturn the developer loses all of their subscribers but as the market turns up, they can re-enter C2 with a different name and start fresh. This is one more reason for us (subscribers) to pay attention to short term corrections. Most of us is not interested in market statistics of the last 118 years.]

I understand your point of view Jozsika. Good luck!!!

Thank you very much for your comments NormanBooth. All these considerations that you mention are very important. All these factors are very important. Determine what type of strategy you should follow and how you should form your portfolio.

From my point of view, even in difficult times of the market, it is very important to have a long-term vision. In my particular case, that has helped me control my emotions and this has allowed me to significantly improve my results.

All people are different and probably each of us will have to find an appropriate system. That is very challenging. … but let’s not forget that we only had a bad day. Do not jump to conclusions so soon.

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Sorry I just don’t get what’s the point or the question of this post. U copy pasted a Tony Robbins article here.

did u want us to read it? Is that what you believe and you want share your opinion? Or you are telling us Tony has a very valid point?

How are we suppose to response to this? I’m just confused. I mean it’s a good article, did u want us to share our outlook?

Jozsika, you make some good points. The systems on C2 are more trading than investing systems. The only form of protection that you didn’t mention is puts. I have only been on C2 for a short time, and am surprised how few seem to consider these instruments. To illustrate, take a look at the graph below which shows the SP500 for the period of Sept to Dec, 2008. The green line is the market. The blue line is a simple trading system that is intraday and uses a stop set at $500. The red line is the same safety interval ($500) but with puts. I also assumed a put cost of $500 per day (quite on the high side). Obviously, the puts win out. I chose that period because it best illustrates my point, but other periods show that as well. In fairness, I know a good trader with the stop approach can pick good entry points, but I can also argue the same pertains to the put trader. Also, much if not all of the put cost can usually be “traded away” with entry as well. That’s what I do. My point is that evaluating a good/bad system based on a few days of big drops (as you point out) requires more than just looking at gain versus loss.

Can you do the same chart for time frame from JAN 13 to December 2013?

Sure! Here is 2013. Assumes $500 stop and $100 per day put cost (still very high)

Hello @OSUTIA,

If you would like an options chain, I have data going back to 2011. Any symbol. Any strike price. Any expiration. I would be happy to post a picture of anything you would like to see. For example, if you want to look at SPY options on 3/05/2013 I can post a picture for you. And if you want to look at certain expiration dates. Any expiration that was available at the time you want I can post for you.

I’ll post an example of SPY options on Thursday 2/14/2013 with MAR 16, MAR 22, and APR 20 expiration dates. I did 3 strikes out of the money but I can do any strike price you would like to see. Here’s the example.

If you’re an options seller, I can post some models for you that show you where your Theta falls off or the “sweet spot” for the best location to sell. I’ll give you an example of that also with AAPL options.

Or whatever else you want regarding options. Vol collapse strategies or delta neutral strategies. I’m not sure how deep you go with options.

Good day

Hello @RFC-Agathos1

I think your charts may be slightly off. In the first chart you used $500 puts. In the second example you used $100 puts. It’s not comparing the same thing.

Good day

I realize that. I didn’t intend it to be a deep dive. I was just making a point. 2008 vols were much higher than 2013, thus the reason I did a quick 5 min chart with a lower put cost. I trade options heavily and know there are hundreds of variables.

OK thanks. Is it possible to see the second chart with the $500 puts? It would be interesting to see. Thanks in advance!

Here it is with $500 interval and $500 put cost. But I’m sure you’re not suggesting an apples to apples comparison with 2008 put cost since volatility in the fall of 2008 was about 5x that in 2013. The chart is meaningless.

Thanks @RFC-Agathos1

No I wanted to see for myself. I understand the impact vol has on options. In 2008 options cost more than $500 when the VIX hit a high of 96.40 depending on how much protection you wanted and how far out.

Thanks again for posting!

You’re right. I usually short OTM calls as a way to offset put costs. (I don’t do on C2 because it’s just not worth the hassle plus C2 doesn’t support ES options which settle in cash). When a long underlying position is in place, the short call is covered. I hope we never see another 2008 but you never know. For what it’s worth, the vols this past week were a gift horse for call shorting. With the top heavy market, it was reasonably safe to short near term calls that were a fair distance OTM. I collected enough premium to pay for 2 to 3 weeks of upcoming put premium. Doing so in 2008 was no different but did require some careful planning ahead. Thanks Payoff! Congrats on the week. It will be fun so see things ahead.

Yeah volatility always a good thing if you’re a trader.

For the model you described, with an underlying it models a bear spread which has capped risk exactly. Obviously I doubt you would do it without an underlying because that has unlimited risk. Do you think C2 allows bear call spreads? Here’s why I ask. It models what you described exactly without holding the underlying. You take in the credit and your risk is defined. A bear put spread models it also but you wouldn’t want to do that since implied and historical vol priced the SPY options high even before Friday.

For example put that on with a 70 delta with a minimum 3 weeks out. Pick up some lunch money that way. What would have been really sweet this week is a put ratio backspread. All your investors might have looked at you funny but it would have definitely made some money.

Thankfully we don’t fight like others do on these forums and actually talk trading. I like this bouncing ideas off each other. Good talk buddy!

Congrats on your week also!