WHAT ABOUT BLACK SWANS OR AN EVENT SIMILAR TO 1987?
There is nothing we can think of in the “well, what about this” realm that markets have not considered, including the odds of an almost infinite number of “what if” or “black swan” events. Therefore, the odds of black swan events are reflected in the present day hard data and charts.
There are very few true black swan events. For example, the day before Lehman Brothers declared bankruptcy, the trend-strength portion of the CCM Market Model was returning a bullish score of 0 and a bearish score of 100 (scale 0 to 100), meaning the hard data was screaming “stocks are not a good place to be right now from a risk-reward perspective”. Based on the facts in hand before the event, Lehman Brother’s collapse was far from a black swan.
As described in this video, hard data can also help us better understand when markets are extended and more vulnerable, as they were in 1929 and 1987. This video takes a closer look at 1987 in the context of hard data and probabilistic models. At CCM, we have used historical market data and our model's output to simulate numerous types of rare market events. Walking through rare events step by step provides tremendous insight, which can lead to a calmer, more composed, and confident approach to difficult periods that are sure to surface for investors over the next 40 years.
It is extremely important to note, some events are harder for probabilistic models to handle than others, including 1987. The CCM Market Model helps us assess the probability of good things happening relative to the probability of bad things happening. The probability of bad things happening is never zero. Probabilistic models, like the CCM Market Model, cannot predict the future; they cannot eliminate risk; they can assist us in better understanding and mitigating risk.