This Time Is Not So Different

The first time it happened was September 26, 1955. Earlier that same year, Ray Kroc started McDonald's, Elvis made his first TV appearance and Congress ordered all US coins bear the "quote" --  In God We Trust.  Just two days prior, President Eisenhower suffered a heart attack. That was the first time the S&P recorded a single-day 6.5% loss. In the intervening years it would happen 11 more times. Yesterday was the thirteenth time it's ever happened.
To say this time is different is self-evident. McDonald's is not a start-up and Elvis is dead. Of course it's different. This is enough to persuade most that data mining what happened afterwards is a futile effort. Most of the time, what happened next is an almost perfectly distributed result around a mean of zero. But this event has a unique distribution on what happened next. The next day has historically experienced a positive return. Not every time, but just 11 of the past 12 times. Based on that edge and with the help of a little Haskell and R, I calculated that on Tuesday August 9, 2011, the SPX should close at 1160.65 (calculated when ES futures where trading around 1080 mind you). This is of course a silly prediction. But it's a marker of sorts. It tells me that pressing a short is probably a really bad idea.

It wasn't enough for me long the future. I'm thinking next time I see something like this it should be worth a shot though. If you look at returns over Day 2 and Day 3 after such a precipitous drop, you'll see that every time the index experienced a positive return. Every time. On Day 2 the total returns from the close of Apocalypse day had a minimum of 0.82% and a maximum of 14.91% with a mean of 6.38%. On Day 3 the min was 0.71% , max was 13.94% and mean was 5.94%.

Present events are not bound to the past. Obviously if the President had a heart attack three days ago, we would have heard about it by now.