🔴 The S&P 500's Worst Day of 2019 Explained (w/Jessica Rabe) - YouTube

Come to Tran ideas, I'm Alex Rosenberg here with Jessica rabe co-founder of data trek research. Thanks so much for coming in Jessica

Thank you for having me sure

So you're here because yesterday was one of the I think their worst day for Sox 2019 down just about 3% the sp500

We're recording this in the morning bouncing back a little bit, but we'll see what happens through the rest of the day

But you've done some really interesting research on down days in particular what down days tend to mean for?

Sox over the next week over the next year

So maybe you can help us figure out a little bit about how investors should think about?

Down days like this and and how to allocate going forward of course. Yeah

So yesterday was almost down 3% That's actually not particularly

Uncommon when you look back in historical terms, it really takes a down 4% day on the sp500

When it really when you can really find an investable entry point

So we went back and we looked at all the down 4% days over the past 60 years

Which is a the full data series for the S&P 500 what we found is over the next day

It's playing out how it is. Actually today. You pop a little bit maybe a hundred basis points higher the next month

You're actually flat but over the next year

You're actually up 20% So I would look for more volatile days not so much in down 3% day

but actually down 4% day where you can actually buy at the close and

Find an investment entry point that you know up you're up on average or the next year 20%

Another thing, you know

this is coming in the context of part of the maybe the reason that this day seems so

Shocking is it's in the context of a very still pond and then you get this rock tossed into it

But normally it's it's a bit more of a ocean current to use a tortured metaphor here

But but what I'm trying to say is that we've had very little volatility this year in comparison to years past

I know you've taken a look at that as well. Yeah, that's very true

It's been actually very little volatility

Which is really unusual to be mid to late cycle where we are economically

So if you look back in history, there's usually 53 days in which the S&P 500

Rises or Falls by one percent or more of one percent day every week

Of the year this year. There's actually only been 20

So the queue on average is certein and the queue to average is 13, but they're only 11 and q1

They're only 7 and q2

So we're running very much under pace even over a month into the q3 where there's again 13 on average

There's only been 2 so actually what you saw yesterday was more healthy market churn

And does this market trend do you think that this could lead to a period of more?

you know closer to the average or even above average volatility is that you know does volatility tend to cluster like that and so you

Wouldn't be surprised to see more, you know, 1% 2% 3% even 4% days and the weeks to come

Absolutely, and you're seeing that today with the bounce-back so as much as there's been 41 down 4% days over the past

Six years. There's also been 42 up 4% days

So both unusual, but both tend to cluster together if you look back at the years in which that's happened

They all cluster together over, you know

Do you think 2008 during the financial crisis 2011 during the Greek debt crisis the dot-com bubble in the early 2000s?

1987 with the market crash there's actually as much as a down 4% day as a signal of an investable bottom if you look at

Days in which the SMP is actually risen by 4% They tend to cluster together

So if you invested on a day where the close was up by 4% the next year

It was up by 17% not as much as 20% as a down 4% days

But still up by 17 percent over the next year on average

So you basically have seen more volatility and since stocks rise more than they fall

The more volatility tends to lead to more, you know, bigger returns just because stocks tend to rise and more volatility

You know tends to bring you higher, I guess that's right

and we expect more volatility to continue more market churn as

Much as we're having a bounce today

If you look at the VIX when it Peaks or bottoms for the year back to when it was created in

1990 its peaked the most in August. We've been warning our clients for a while that expect more volatility in August and

You know, it sure happened very quickly at the the turn of the month

So the VIX has peaked 5 times for the year in August also 5 times for the year in October

So it takes until November where?

It sort of starts to calm down. December is the quietest month of the year with actually bottoming 8 times for the year

but but August and October are historically very volatile and especially

August just do to even lower trading volumes of people and on vacation

Etc. But we expect a lot more market churn in the next few months because of that and then come November it should start to

abate and these warnings about August

This is very interesting started in that toward the end of January as you were looking at what?

because we obviously had a very good January after a very bad December and

You were looking at what good January's tend to mean for the rest of the year

So I'm trying to wrap my head around

How are you? You're able to predict the rest of the year based, you know month by month

But maybe walk us through some of what you were looking at then and and some of maybe why that methodology might work

Of course, so we had a you know, terrible q4 of last year December as you said so January

we had a major snap back on a but

January's up by 7 percent

Return that's one standard deviation above January's return going back over the past 60 years

So we looked at all the January's in which SP like this year has risen by over one standard deviation

Above the January average. It's only been eight other years. It's very uncommon

So then we looked at all the months after and how the SMP 500 has performed and we found that

February through July each month that momentum carries through so you're up higher through July

Come August and this fits with all the volatility data

You start to be down

You know anywhere from 10 to 50 basis points from August

September and then down on average two and a half percent in those eight years in October

but then you also again fits with a volatility data or volatility abates and you

You start recovering in November through December

so on average during the years in which

January the S&P 500 has returned above once in a deviation above the average total on a total return basis

You're up in average

it's those years have been up an average of 27 percent and

All of the years except for one were up by double digits

The only exception is 1987 and even that people forget was up

6% on a total return basis

Yeah

that was a that was a crazier because the market just went up 20% came down 20% in one day and then just kind of

Ended flat from there. Yeah, and the playbooks worked really well this year the

Just like the S&P 500 has been up from February through July for each of those eight years

It's worked every month this year except for May because of trade concerns. We're done over 6% but we had a snap back in

June and

That carried through July and now of course, we're getting more volatility

But we do still expect to end the year higher by double digit returns in line with that January playbook

so with that being said should people just kind of hide out until maybe

November 1 till they're starting to put together their their Thanksgiving plans or are there signs people can look forward to that

Maybe it is good time to get into stocks again where you know, what signs would you be looking for it?

We actually last night put out on our blog basically

For signs for an investable bottom after yesterday again down 3% day or almost 3% day

Not that uncommon so as much as it's been on volatile this year

And that that seemed like a big move. It wasn't really and even the VIX only got up to a 24 handle

That's within one standard deviation above the average of 19 since 1990. So not too crazy

What we would look is number one look for the VIX to go above 30

So in q4 of last year the VIX did rise above 30 and that's really what got fed

chair Powell's at and

So we're looking for

Number one a Vicks above 30 and then in the same vein of getting fed chair pals opinion

We want to really see Fed Funds futures

Start pricing and over 50% chance of a 50 basis point cut in

September so as of last night after a bad

You know market day it was pressing in a 60 percent chance of a 25 basis point cut

Well, I know a 40 percent chance of a 50 basis point cut

So really think you need to look to when it gets to 50 percent chance where markets are really convinced that they'll do it

So that's number two number three is already starting to happen. You really want to see the chine China's currency start to stabilize

Obviously the markets bouncing as of early this morning because of that and then number four

We really think truck bitcoin the price of Bitcoin even if you're not invested in it because over the past week through this wand

Evaluation news it was up 24% and it was up 7% within the first 24 hours of the one

devaluation that's because of capital flight that it causes and so

we think look for it to start declining and

That will signal to investors like it's like China's doing now stabilize our currency

But also to get more serious about really having trade talks with the US

So you're looking for a VIX of 30 or higher which another 3% down day could happen

Only a you need a slight increase in the chance of a 50 basis point cut

China's currency to stabilize which you know it

At least today this morning

it's stabilizing a bit and then in terms of Bitcoin you're looking for a

Because those would all I guess the first two would show maybe could pitch you a bit of capitulation

the third would be fundamental ease and then

Bitcoin is that also?

That's also around China the soaring

You want to see Bitcoin sell off a bit to indicate that you know more stabilization and China less money fleeing China

Is that the idea right? Yeah, the China's wealthiest citizens one say

They believe that the one will stabilize more though

They won't there won't be as much capital flight fleeing the country

God it got so alright so we could you know by the end of the week

We'll see it could all come together these these four things

I think we'll certainly see more volatility, but we're so bullish on the year and again back to that

August 2015 reference that I spoke about so from 2014 to 2016

Earnings were pretty stagnant kind of like they are now

But you add interest rates fall from three percent down to one point four percent right now. We're as of yesterday

We're down to one point seven percent on the 10-year Treasury

So similar in height in the early in here going down

Over the past year going from you know above three percent

Down through two percent as long as you have falling interest rates

Even though earnings are stagnant. We can certainly be up on the year from 2014 to 2016

The S&P was up a total total of 28 percent even with flat earnings

So even though we have flat earnings this year and they've actually been pretty resilient giving all the trade concerns

lower interest rates and now hopefully the the Fed will continue continue continue to ease and

We do think we can be up on the year

All right

So we're ending on a bit of an optimistic note and either way investors know what to watch out for those four signals

So Jessica, thanks so much for joining us and and I would just say data check research does a lot of fascinating things

You know, I love your guys work. I love the research the numbers and also some of the storytelling you put into it

So anyway, congratulations on what you do there and thanks for joining us here on real vision. Thank you for having me

So while she's not particularly optimistic about stocks between now and November

There are four signs that jessica is looking for which if all them had served as a buy signal one the VIX

Rising above 32 the chance of a 50 basis point cut in September rising above 50%

3 a stabilization of the Chinese one and for a sell-off in Bitcoin which would signal the end

A Chinese capital flight and portrayed ideas. I'm out Rosenberg

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