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A few key numbers to handicap a scary tape

Michael Santoli
·Michael Santoli

When stocks undergo serious stress, market talk turns from stories to stats.

Just weeks ago the buzz was about Amazon’s (AMZN) work policies and Twitter’s (TWTR) CEO search and Ford’s (F) aluminum-body pickup truck.

But now the S&P 500 (^GSPC) has rushed to its first double-digit drop in four years with historic speed, and then recovered nearly half the loss almost as fast. The selloff was hard to avoid and the bounce nearly impossible to catch.

After months when the main U.S. stock indexes barely responded to changes in economic fundamental and global market currents, they are now whipping around far more dramatically than the news flow itself.

At such times, investors start grasping for numbers to light the dim path ahead. Here are a few to keep in mind as an anxious new week begins:


The CBOE S&P 500 VOlatility Index (^VIX) index of protective option prices got over 50 in the heat of Monday’s panicked selling. That’s high enough to register an “extreme fear” reading that can precede a market recovery.

But the VIX remains elevated in the mid-20s, a sign of abiding stress among professional investors forced to reduce stock exposure. Until this number sinks back below 20, it’s still a bit too high to flash an “all clear,” and many traders will view rallies with suspicion unless and until we get there.

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That’s how many days, on average, it has taken the S&P 500 to go from peak to bottom in a correction of 10% or more since 1976, according to Goldman Sachs. The current downturn has lasted 67 days. So the odds say we’re about there, right?

Not quite. Declines that turned into bear markets averaged more than 300 days, ranging from 50 to the 638 days in the 200-2002 collapse.

What this means is that – if this remains a bull market, governed by the 6-and-a-half-year uptrend – then the low shouldn’t be too far of in time, though even the average non-bear-market setback was deeper, at 15% in total.


That’s the “earnings yield” of companies in the S&P 500, or the last 12 months’ profits divided by the index level. This is 3.6 percentage points above the 10-year Treasury yield (^TNX).

That flatters stocks, making them look quite cheap compared to history, and even versus most times since the financial crisis, when Treasury yields have stayed quite depressed. While not a good investing guide when used alone, it suggests a margin of safety is being rebuilt in stocks.

For this to matter much, the yields of riskier corporate bonds need to quit rising, as now they are making stocks look less attractively valued as they climb.

The market remains stuck between bull and bear status, and is caught somewhere between expensive and fairly valued.


That’s how many times over the past year hedge-fund traders have had such low exposure to stocks, based on futures position data tracked weekly. Even over the past five years, such pros have almost never had so little equity risk.

This fits with many other indicators of a flushed-out market, such as retail-investor withdrawals from stock funds. These are the prerequisites for some kind of trading rally, but are not enough to ensure one. Or, maybe this is what the snapback last week was about, and has relieved the immediate pressure of these extremes.


That’s where September ranks among the 12 months in terms of average stock-market performance. Especially in the last 20 years, September has been the roughest month to own stocks – but September and October have also has been when some decent bottoms have occurred.

Did we front-load the traditional September nastiness with the ugly decline in August? Have stocks mostly priced in the risk of company earnings warnings, emerging-market currency stress and whatever the Fed might do in 17 days?

It’s tempting to think that this violent shakeout has been about stocks being sold by those who think the scary stuff is coming along these fronts in the next few weeks to those who figure it won’t be so frightening. But it’s hard to put a number on the odds that this is the case.

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