Recovering from a severe drawdown takes an extraordinary return just to get back to where you were. This is sometimes referred to as equivalent return and is represented by this formula: While the terminology for drawdowns is subjective, I'll stick with the ones that Sam Stovall (Standard and Poors) uses, as they are as good as any. I have often thought one more term for bear markets greater than -40% would be good, such as Super Bear, but I have other battles to fight. Drawdown Magnitude is the percentage that price has moved down from its previous all-time high. Drawdown Decline is the amount of time the market declined from an all-time high to the trough. Drawdown Duration is the amount of time that it took the price to recover to is previous all-time high. Drawdown Recovery is the time it took from the trough to get back to an all-time high. The following describes the nomenclature used in Chart A. In other words, they can be measured using Gaussian statistics and distributions. If you truly believe that, you must not believe a thing I have ever written in this blog. Furthermore, that belief is also aligned with believing that investors are rational, and all investors always agree on returns, risk, and correlations. Again, this is just the nonsense of modern finance and hopefully a good technical analyst will understand why. The month of December 2018 was a bad month for the market the rally in the last week of the month was nice but small compared to the month's decline. 2019 has so far continued the upward move, so I thought it was time to show some data on market drawdowns. If you have been reading my scribblings for long you hopefully recall that I view drawdowns as the best measure of risk. Unlike modern finance that says volatility is risk and volatility is defined by standard deviation. Hey, if you use standard deviation, then you are also agreeing that the markets are random and normally distributed. If you have read my blog you know that I use the Nasdaq Composite as my measure of the market and it is down significantly as I write this. I thought this article that I wrote over three years ago on Januis quite appropriate for today.
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