An Interesting Look at Standard Deviations (3)

Bespoke Investment Group presented a chart showing the relationship of the S&P 500 and its 50 day moving average along with the area that's 3 standard deviations above and below that number. The recent correction of nearly 10% got to the lower mark on the 3 standard deviation level. It helped that there was a big lack of volatility before the market made its recent plunge.

It remains to be seen whether this is a tradable indicator.

Source: Bespoke Investment Group

This Could Mean Trouble Ahead for the Stock Market

Notice how the percentage of bears in the AAII survey is two standard deviations from the one-year average.

Source:

Sentiment's Edge

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Jeremy Grantham's Definition of a Bubble

John Mauldin has published an excellent article on the flaws of the Efficient Market Theory. Mauldin also mentions the study done by Grantham, Mayo and Otterloo:

"The first stock exchange was founded in 1602. The first equity bubble occurred just 118 years later - the South Sea bubble. Since then we have encountered bubbles with an alarming regularity. My friends at GMO define a bubble as a (real) price movement that is at least two standard deviations from trend. Now a two standard deviation event should occur roughly every 44 years. Yet since 1925, GMO have found a staggering 30 plus bubbles. That is equivalent to slightly more than one every three years!"

2SD Comment: Fertile ground for profit!

Source:
http://www.frontlinethoughts.com/gateway.asp
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