History Shows this Market Has Even More Upside
And the point here is that we are clearly now afforded more opportunities to easily achieve these record-closing streaks.
An important missing component to this analysis, however -- one that helps us to understand the difference between the recent market performance and that of 1996's "irrational exuberance" performance -- is the variation in streak performance during the periods.
We will define variation here as the standard deviation, which is a common risk measure in finance. During 1996, this variation was slightly less, implying that record trading days that initiated any streak were steadier and more of a given.
Despite implied volatility indicators being similar both now and then, recent market participants are this time more wary of a pullback, speculating that the liquidity-driven rally might support a market retrenchment.We have then calculated statistical ratios of the portion of record days in relation to the variation in streaks associated with that time event. This assists in measuring the performance in record streaks, adjusted for estimation risk, quantitatively. And the statistical ratio shows higher values now (21%) than in 1996 (17%). So this adjusted indicator is registering a high degree of upward bias in the markets, even adjusting for variational risk, versus the "irrational exuberance" period. So things indeed are much different this time. The lessons we learn from contrasting this recent market environment to both the Great Depression and the "Irrational Exuberance" period, is that with greater policy maker's attention to the markets, a sustained low period of volatility does not return until much later after the inflection period is carried out. Currently, we are in a bottoming phase of market volatility. This phase has already occurred in the fixed-income markets, other global equity markets, commodities and in specific industry sectors of the U.S. By the time rates rise, we can see a heightened volatility regime return once more. The author has performed rigorous statistical analysis on when rates will firm and shows that this is a one-in-five probability for 2015. And in any event, higher volatility doesn't mean that equity prices can eventually rise to new levels. In fact, as an epilogue to the 1996 event, we note that roughly two quarters after Greenspan's irrational exuberance comments, the markets had a substantial correction, but then proceeded to form the much higher technology bubble peak that defined the times.
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