It seems like pullbacks have been really small lately, so I whipped up a new indicator called Percent off Peak, and took a look at the history of corrections. The indicator simply ratchets itself up as new peaks form, and then calculates each bar’s percentage off (at close). Here is the chart, below. Note that I am using a log scale, so that moves of a given percentage are the same size up and down the scale.
Sure enough, the SPX hasn’t had a 10% pullback since August 5, 2011. Next, I wrote an indicator to count the bars between pullbacks of a given size (this is variable, but I stick with 10%). The tricky thing about counting pullbacks is choosing the start date. You can’t see a 10% drop from an intermediate peak, if it’s still in the shadow of a higher peak.
To get around this, I reset my bar counter after each pullback of the given size. Finally, I code a dummy buy signal based on this routine, so that the strategy evaluator will automatically collect the dates. Here’s how that looks, around the top of the dotcom bubble. This was just a rounded top on the SPX, by the way – the “crash” was on the NASDAQ.
I ran the strategy from February 1975 to the present, collecting 40 years’ worth of corrections. They’re surprisingly rare, only 34 in the period. The histogram is below. It looks like a Poisson distribution, which is what you’d expect for an interarrival rate. Call it the market’s “mean time to failure.”
Continuing in the Poisson vein, we find that the mean (which is also the standard deviation) is 61. Yes, that’s why I used a bin size of 30. So, the first four histogram bars contain 29 observations within one SD of the mean. Here are the five outliers:
Note that the second and third observations are linked. That was the only correction in a ten-year bull market. Maybe we are in another one. I’d feel more confident if we had some fundamentals to support it, like “spending the peace dividend.”
I did not try to draw any inferences from these five (they’re outliers, after all), but I did notice one thing. When a bull run goes more than three years without a correction, whatever ends it gets a catchy name.