Historical Data: There's No Precedent For A Drop Of 3.6% Or More This Week

This article was originally published here, on Eidosearch.

"Unless you can watch your stock holding decline by 50 percent without becoming panic stricken, you should not be in the stock market" -Warren Buffett

Chinese markets are in free fall, oil prices are plummeting and many emerging markets are now teetering on the edge of bankruptcy. Yet, there is 85 percent probability the S&P 500 drops less than -1.2 percent by this Friday’s close.

This is a bold statement, since as of this writing (around 9 AM) S&P 500 Futures are down another 4 percent on top of the already 5 percent drop we saw over the last two trading sessions last week. However, this is not a prediction. This is just statistics and a gauge for the most likely outcomes this week for the S&P based on the markets reaction to similar trading environments throughout history.

THERE IS NO PRECEDENT for a drop of more than -3.6 percent over the next five days.

We looked at the last 10 days trading pattern in the S&P 500, and found about 100 statistically similar 10 day patterns in close to 40 years of the Indices history. Here’s a visual on the 5 most similar matches, with dates on the bottom and what happened in the next 5 days in green:

Plotted below are the next five days returns for all 99 highly similar matches we found for the current 10 day pattern in the S&P 500 as of Friday’s close. The worst result is a -3.6 percent drop in the next 5 days, and only 5 of the 99 are off more than -2.3 percent:

The stats table above shows an Upside and Downside band between 3.4 percent and -1.2 percent. We’ve done millions of predictions on these types of projections, and there’s 85 percent probability the S&P 500 will be above a -1.2 percent drop by Friday’s close.