There’s always been a lot of groping and feeling around on Wall Street, and now more so than ever. Everybody wants to lay their hands on that firm bottom.
However, in order to find the real bottom, we have to know when the support hose went on.
One measure of variance is the coefficient of variance, which is the standard deviation divided by the mean. I did that for three day intervals for the Dow, Nasdaq, and S&P for the last 30 years. For this post, I’m going to consider the coefficient of variance to be a measure of relative risk; therefore, as the coefficient of variance increases, so does stock market risk.
Here’s the plot of the coefficient of variance versus time:
The first thing to really hit you is probably the huge spike in 1987. That corresponds to the Black Monday event of October 19, 1987.
As we roll into 1996, however, there is a sustained upturn in the coefficient of variance, representing increased risk over an extended period of time.
The graph below helps to pinpoint when the market started to change and grow in an erratic, unregulated, and ultimately unsustainable way.
What’s so fascinating to me is that the date pinpointed as the date when the market growth became erratic, risky, and unsustainable was October 19, yes, October 19, 1996. Why October 19? It’s a mystery, but I’m not going to buy any stocks until after October 19 of this year, I promise you that.
Up to October 19, 1996, the growth rate was much less erratic, more predictable, and, apparently, more sustainable. Based on the 20 year period from October of 1976 to October of 1996, a projection can be made of where the market would be right now based on that growth rate.
The following table shows the results of that extrapolation:
Compare these projections with the current numbers from Yahoo! Finance, and you’ll see that things could get a lot worse. Things might not get much worse, but the numbers above are mathematically sound.
If these purely mathematic projections are anywhere near correct, we still have a long way to fall. Unfortunately, most of us don’t have golden parachutes, although when I’m falling, I’d much prefer a rip-stop nylon parachute.
Tags: bear, Black Monday, bottom, bull, coefficient of variance, economy, golden parachute, October 19, Wall Street, Yahoo!
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