January’s false start marks return to normal for stocks

We have been thinking a lot about winning streaks lately. Looking at charts of the S&P 500 index it is hard not to be impressed by how many positive monthly returns we have had since the “resolution” of the last full-blown Euro crisis in mid-2012. We wanted to gain some historical perspective so we counted the number of negative monthly returns in a rolling 12 month window. We noticed a high correlation with the spot VIX. An ADF test suggests they are cointegrated.

While the current market turmoil may be a departure from recent history, in fact we are just returning to a long-term normal. Since 1990, we have had an average of 4 down months out of the last 12. The decline in the S&P last Friday puts us right at that mark.

The blue line plots the number of down months over the last 12 months against the VIX (grey)

The blue line plots the number of down months over the last 12 months against the VIX (grey)

Categories: Volatility

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