Realistic Expectations


We all know even in the context of a bullish trend, the stock market does not go up every day, and yet, for some reason, it is difficult for all of us to remember that during inevitable drawdowns.

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All uptrends feature a primary trend and normal countertrend moves. This is easy to understand from a textbook perspective, but harder to grasp when markets begin to backtrack. The chart below shows a massive percentage move that began after the major low in March 2009 and lasted over a year. If an investor wanted to participate in the very satisfying longer-term gains, they had to endure a ton of gut-wrenching volatility along the way. This is the rule rather than the exception in the world of investing.

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The image below was covered in the May 15, 2020 video. The S&P 500 closed at 2863 on May 15. There is a reason the videos have featured “REALISTIC EXPECTATIONS” in large orange text over and over again in recent weeks; we know it is only a matter of time before a strong bullish trend enters a “give back” period.

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We experienced unnerving volatility last week, which is not shocking given the prior three weeks featured very satisfying gains.

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As noted in the June 12 weekly video, the trading session on Thursday, June 11 was extremely slanted in the risk-off direction. A number of ugly data points were produced that day, including a big spike in the Volatility Index (VIX). Since the VIX measures market participants’ volatility expectations looking out 30-days, it might be helpful to know how the market performed following similar spikes.

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The VIX three-day rate of change (bottom of chart above) was 58.04% as of the close on Thursday, June 11, 2020. We studied cases with a similar three-day rate of change (those inside the blue bands). S&P 500 performance over the next week to three years is shown in the table below.

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The message from the table above is basically identical to the data-based message covered in recent weekly videos:

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