1987 AND 2008
We have seen numerous data sets in recent days that align with 2008 and 1987. Another example surfaced after today’s close. The present day VIX is based on a “new methodology”. Since there is more historical data for the original methodology, we used VXO for this comparison.
The intraday high for VXO was 95.56 during today’s selloff in stocks that featured a drop in the Dow of almost 13%. Drops of that magnitude in one day are rare. As you might imagine, Monday’s VXO readings were rare as well. An intraday VXO reading of 95.56 or higher has only gone into the history books during two other periods (2008 and 1987).
In the image above, notice how the 2020 rate of change (ROC) in volatility expectations is much more similar in the 1987 case relative to the 2008 case.
HOW DID STOCKS PERFORM WALKING FORWARD?
As shown in the table below, the 1987 case was close to the final low in terms of price, but it took an additional 46 calendar days to register the final low. The 2008 case was quite a bit more painful and featured an additional S&P 500 drop of roughly 25% from the S&P 500 level on October 10, 2008. In the 2008 case, it took 150 additional calendar days to reach the final March 9, 2009 low. In both cases, a sharp 2-3 day countertrend rally occurred with gains ranging between 11% and 15%. Therefore, even if the market has further to fall, we should be prepared for another wild swing to the upside in the days ahead.
In the 1987 case, the low was successfully retested weeks later. In the 2008 case, the retest of the low failed and was followed by months of additional pain.
THESE CASES SAY WE MUST REMAIN VERY FLEXIBLE
If 2020 turned out to be more similar to the 1987 case, then it would be extremely important for us to respect that major lows are typically made before the fundamental issue is in the rear view mirror. If 2020 turned out to be more similar to the 2008 case, then we must continue to be diligent regarding principal preservation. Both scenarios must be respected walking forward.
At some point in the future, an excellent entry point is going to present itself. Those who remain diligent, focused, and composed will have much greater odds of getting properly aligned with that opportunity relative to those who are frustrated, fearful, and undisciplined. The choice is ours to make.