NEW YORK (
TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with
RealMoney Pro readers in his daily trading diary.
Among the posts this past week were entries about stock market crashes and the
Fed's Beige Book.
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Putting Crashes Into Perspective
Originally published on Friday, Oct. 18 at 5:58 p.m. EDT.
One retest of the opening lows one hour into the day, and that was about all the threat bears could muster. I still get the feeling that too many people operate with a bomb-shelter mentality -- the fear of getting hit by a "crash." Could it happen? Absolutely, but in my trading, the "flash crash" was as close as I'm come to experiencing a crash.
It is interesting though to look at the
single worst days
in the history of the Dow Jones, courtesy of
The Wall Street Journal
. Since the crash of 1987, in which the Dow dropped more than 22% in a single day, there has not been a single-day drop exceeding 8%. In fact, there have been five down days of 7%-8% since 2000, which means there is about a 0.15% chance it will happen. Since 1987, a drop of 7% or more has occurred seven times, or about a 0.10% it will happen.
Well, that's about once every 3.5 years, so I should stay vigilant, right? Well, that's the kicker -- these drops appear in clusters. Furthermore, when you factor in three up moves since 2008 of 6.84%, 10.88% and 11.08%, along with a double-digit move in October 1987, you find that the big up moves often shadow the big down moves. The big move in 1987 offset one of the big drops the same month. Two of the big moves in 2009 offset two of the big drops in 2009. In other words, the big moves up happened within a week of the big moves down.
In the end, when we factor out the big moves higher against the big moves lower, we really only find about three times since 1987 a substantial single day move lower is the kind of move keeping some folks out of the markets in any manner. We are talking about a .045% probability. And the move down in 1987 was last seen 58 years earlier.
All this means is that if you are avoiding the market or staying short looking for the big 10% or 20% drop, then the odds are stacked against you. In fact, if a big drop is coming, it is more likely to happen over a matter of days and weeks, giving folks time to hedge, adjust positions, exit longs or get shorts in order to play the move. Furthermore, many of the big initial drops were met with big snapbacks, which also provide the aforementioned opportunities of adjusting portfolios.