What If?

What if stocks go down?  Yes Virginia, just as there is a Santa Claus, at some point stocks will have a decline again.  So let's just do a little "what if"  scenario and pretend that last week marked a top in the market.  Now of course I'm not saying that it did, just as I don't know if stocks will go up this week.  I'm simply saying let's pretend that if we're on the verge of a trend change what would that look like. We'll just take a look at the S&P 500's ETF symbol SPY in this analysis.  I've drawn the lines of where such a decline would likely take us above based on last week's prices and historical percentage benchmarks.  You can double-click on this chart if you want to make it bigger.

So say we have something so benign as a 5% correction.  That's the sort of thing that used to occur regularly before it seems they decided to outlaw volatility.  Based on last week's closing prices this would take us down to around the 253-255 level on the SPY, or about to where we were trading in October.  You would right now give up about six weeks of gains.  

A 10% correction would take you back to roughly the 240 level on the index or back to levels we saw early in the summer.  A 15% decline would trade around the 225 level and roughly wipe out all of 2017's gains.  Remember the historical volatility of the S&P 500 is something like 14%.  A 20% decline would roughly take you back to where we traded around last year's election.

And that's it.  It's perhaps a testimony to the power of this year's rally that from where we're currently trading it would take a pretty significant decline to erase the all the gains of the past 14 months.  Notice that right now a normal bear market, which by definition is considered to begin when stocks decline around 20% does nothing more than take last year's gains away.  At some point stocks will go down again.   I'm trying to give you some conceptual context of what it might look like the next time this happens, assuming we have something that could be classified as a normal correction in a longer-term secular bull market.

I have a lot to get completed before the end of the year and I will be gone over the Christmas holiday.  Right now I'm planning on posting here a few more times this week then I'll be shutting it down until 2018.  

We own ETFs related to the S&P 500 in client and personal accounts. Short S&P 500 in a personal account as part of a separate individual strategy. Positions can change at any time without notice on this blog or via any other form of electronic communication.