8/13/2023 0 Comments Stock drawdown![]() We utilize the positive effects of the recoveries for a simple timing strategy and apply it also for equity rotation with the exact same settings. All of the last five identified periods (all since 2012) are among those single digit events. In seven out of the nine drawdowns, the downward trend already stopped in the single digit region. ![]() Even if the figures are only paper losses, stock market investors are not happy to see these in their portfolios. The maximum drawdown would have been -19.4% for the S&P 500 over the last five calendar years. We do not judge how much the interest rate policy of the central banks contributed to the stock market’s ability to reach new highs so quickly. In contrast to major equity market crisis that elevate markets to lower levels in their aftermath for a longer time frame, drawdown and recovery periods of the last five years were modest. In the worst case, during the rating downgrade of the US in 2011, five months were necessary to recover. On average it took two months from the low of the drawdown to climb to a new high. We focus on the ability of the market to regain losses by reaching new highs. Well recognizable are the last three cases (lightest blue) in which the recovery occurred faster than the drawdown took place and in which the average daily returns were very high (slope on right hand side). The darker the blue line, the earlier the event took place in the past. The x axis stands for time in days, the y axis corresponds to the return in percent. For the future, this strategy might still be attractive for short-term market timing or as an equity rotation strategy.Īssuming that we will see more of those v-shaped drawdowns in an upward biased stock market, our first interest is to learn how dangerous these periods are.įigure1: The chart shows the nine drawdown and recovery periods (schematically) of the S&P 500. ![]() ![]() We evaluate some characteristics of these drawdowns and show a simple strategy which would have benefited in these periods. Over the last five years, the S&P 500 index had nine drawdown periods with downward moves of more than 5% from its 1-year high. ![]()
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