Friday, October 17, 2014

Carter Worth says sell the bounce

[10/17/14] The market has bounced 33% off the low and is hitting resistance.  Sell.

[10/15/14] After a 7 percent drop from the highs, has the S&P 500 bottomed out? The answer may be impossible to know for sure, but historical analysis suggests that stocks may have a bit further to fall.

Carter Worth of Sterne Agee looked back on all the market's corrections of 5 percent or more going back to 1927, in order to get a sense of how long they tend to last, in terms of both time and magnitude. He learned that the average (mean) correction is 12.2 percent, and lasts for 41 sessions. The median correction, which is shallower because it is less affected by outliers, is 8.2 percentage points deep and lasts 22 sessions.

Given that the S&P closed Tuesday just over 7 percent off its highs, Worth takes this information as an indication that there will be more to this selloff.

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The above analysis seems statistically sloppy because you're skewing the sample.  What if you look at corrections over 4%?  Or over 3%?  Or 2%?  Etc.  The average would always be greater than any cutoff you choose.  No great revelation.

At any point, you would have an average correction greater than your cutoff and so you would always be saying sell.  In other words, the opposite of what you should do (buy low).

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