This market environment is NOT “unprecedented”

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John Forman - The Essentials of Trading author

There was a post yesterday on the Daily Speculations blog with the title Unprecedented Events, from Victor Niederhoffer. It talks about the market events of the week of October 10th. As the post title would suggest, they are called “unprecedented”. I beg to differ.

Dictionary.com defines unprecedented as:

without previous instance; never before known or experienced; unexampled or unparalleled

Basically, unprecedented is something which has never really come close to happening before - something we cannot look to prior example to have an indication that it could happen. I’m not picking strictly on Daily Speculations for this. The media and commentators all over the place have been hyping up these moves - worst weak ever, biggest loss since, etc. My contention, though, is that we have plenty of precedent for what’s been happening of late.

If at this point you are wondering what I could possibly be talking about - what similar events in the market there were which could have warned us that things like what we saw during the week of October 10th when the Dow was down about 20% - then consider some history.

• In 1987 the Dow fell more than 20% in a single day.
• At several points in years gone by the Dow fell double digit percentages within a week, including about 14% back in 2001.
• Volatility in the NASDAQ during 2000-2003 (as measured by Normalized ATR) was MUCH higher than what we’re seeing now (44% pre month that the peak compared to about 15% now).
• Many, many individual stocks have moved by huge percentages within small periods of time.
• Rapid commodity price movements such as the spike and collapse in Gold in the early 1980s have happened throughout market history.
• Government and corporate bond markets have collapsed rapidly on several occasions with faster and larger losses that what we’ve seen in stocks.
• There have been some massive changes in forex rates at different points.

Yes, I’ve included non-stock market examples in the above list. Are you thinking I shouldn’t? Why? Because stocks and bonds don’t trade the same? Wrong! All markets are traded by people and as such are all subject to the same greed/fear irrationality. And since they are all so interlinked anyway, they are all subject to the same types of moves.

My point is that you can’t look at a single price series and think that it tells you all that could possibly happen to a market. It doesn’t. The people with that kind of singular focus are the ones that are surprised when their market does something which seems to be new, but which other markets have seen before.

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Here are some other posts which might interest you:

The media won’t help you trade or understand the markets
Opening Gap - Will it hold or will the market retrace?
Making Money While Being Wrong Most of the Time
Risking Something Other Than 1-2%
Video documentary of the Crash of 1929, and other things