Misusing Numbers

From CNBC:

Is Wall Street’s biggest question: After a 7 percent drop from the highs, has the S&P 500 bottomed out? The answer may be impossible to know for sure, but historical analysis suggests that stocks may have a bit further to fall.

Carter Worth of Sterne Agee looked back on all the market’s corrections of 5 percent or more going back to 1927, in order to get a sense of how long they tend to last, in terms of both time and magnitude. He learned that the average (mean) correction is 12.2 percent, and lasts for 41 sessions. The median correction, which is shallower because it is less affected by outliers, is 8.2 percentage points deep and lasts 22 sessions.

Given that the S&P closed Tuesday just over 7 percent off its highs, Worth takes this information as an indication that there will be more to this selloff.

“Were it to just be in line with the median, it means we have at least a percentage and a half to go. Were it to be in line with the mean or average decline, we’re talking about another 4 or 5 percent to go. The principle being that this is unlikely to be at an end,” Worth said Tuesday on “Futures Now.”

Let me see if I have this right: The average of all corrections of 5% or more is 12.2%. Since we’re down by more than 5% but not at the average yet, that suggests we have more to fall.

No. No it doesn’t.

The average of a group of corrections will always be more severe than the threshold. That says nothing about how the market has historically performed or what it’s inclined to do.

Posted by on October 15th, 2014 at 8:40 pm


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