Periodicity in S&P Returns: '88-92

Taking a crack at periodicity in returns in the S&P from '88-92, which passed the first eyeball test of plausibility. Here's the plot I'm referring to (weekly):

Worth noting is the misleading aspect that level changes in the index value in '88 are higher than in later years due to the nature of returns as percentage changes.
A dumb way to do this would be to write some code that identifies returns that are larger than its past and future immediate neighbors. That would tell you the average gap between local maxima is 2 weeks with standard deviation of 0.16. But you're not dumb, so you didn't do that.

Another way could be to find the gap between positive returns that lie outside a deviation, but gradual peaks dodge that method.

I'm not doing this to be academic and thorough, so I'm going to think practically about it. To Paint!

Looking at this, it's recognizable pretty quickly that I'm mistaking a lack of stagnancy for periodicity. Saying that the index fluctuates isn't the same thing as saying the index fluctuates with a pattern.

If I'm going to waste my time testing for something as bold as periodicity, I'm not going to do it on index returns from 20 years ago when even the second run of the eyeball test fails.

And if you wasted your time reading this, what does that say about you?

S&P 500: 88-2000

The value of the S&P rises from 200 in '88 to 1400 closing the century. Investing $1 after the '87 crash would yield $6 at the start of '00. The explanation around the 90's bull market is attributed to the rise in IT.

More interesting are the downward movements during such a significant run-up. The heavy hitter is in '98. In August of that year, Russia defaulted. Best pseudo-name for this I could find is the "Russian Flu".
Wikipedia tells me that the cause was a coupling of the Asian crisis in '97 and drops in commodity prices which Russia relies on. Average crude prices went from almost $20 per barrel (bbl) in '96 to $12 bbl in '98, according to inflationdata.com.
This had implications to a U.S. hedge fund, Long-Term Capital Management (LTCM). According to Hafer and Hein, LTCM had bet on government and corporate bond spreads to narrow. Russian default shook investor faith that governments would be good on their debt. Spreads between government and corporate bonds widened and LTCM took a hit.

 LTCM had $80B in securities and $1T in derivatives. In response, the U.S. government dropped interest rates by 75 basis points and bailed out LTCM with a cool $3.6B on Sept. 23rd. The chart below is for 98-99. Volume spikes, but the market doesn't move very much on news of the bailout. Apparently, trading is popular near-bottom.

Magnifying down to periods of a few years:
[The 88-92 period looks like it shows some periodicity from the eye-test. Might be a nice set to learn how to test for periodicity, but that's a whole different beast.]


 One last plot, showing the rise of the machines. Volume in billions.

Dramatic Tension with Mt. Hope

The Journal published this morning that the main backer for General Moly's (GMO) Mt. Hope molybdenum mine, Liu Han (chairman of Hanlong Group), has been detained in China. GMO was hoping to secure a loan to the tune of $660M to finance construction through Hanlong Group.

Having recently wrote a thesis on a quantitative pricing model for molybdenum that mentions GMO as a candidate with significant upside on rising moly prices, I'm inclined to comment.

The gist of my long GMO call focused on a few things:

1. GMO has hedged out the downside on moly prices. Molybdenum prices have hovered in the $10-12 plb range since the start of 2012 and the industry faces a supply glut going forward, so I can't expect prices to rise barring some significant, sustained demand shock. For the first five years of production, GMO has all of it's moly sold through forward contracts. These contracts ensure that 75% of the moly produced in the first five years will be sold at $14-15 plb. When you're hoping to produce 32 million lbs of moly per year out of the gate, that's around $252M in secured revenue. Assuming $10 plb moly, the remaining 8 mlbs would contribute $80M. With cash costs of about $6 plb projected, that means that they're spending around $192M to generate $332M or $140M in profits from moly operations. Net servicing debt and costs not included in cash costs per pound, that $140M number will decline but it's hard not to see profitable operations.
2. In light of (1.), I think GMO can weather the sour moly prices. All they need to do is survive and pray for volatility. Much like in Soviet Russia, in moly, volatility finds you. 2002-2005 isn't likely a repeat scenario, but moly seems like a good a bet as any for upside potential.
   
3. All of this hinges on securing financing. The sooner GMO gets into the game, the better.

Is this news an entry point to upside moly exposure in the long term? Sure looks like it. Shares dropped overnight almost 20%, hitting a low of $2.10 from $2.80 the night before. One thing is for sure. Using this as an entry point is doubling down on volatility: once for molybdenum prices and twice for the Chinese legal system.

S&P500: 1987 Crash

Spending most of my time so far toying around with plotting in Python. On the back of the LBO and M&A in the earlier 80's, the S&P peaks at 336.77 on August 25th of '87. Towards the end of October, that number is around 240. Some notes:

• It isn't obvious to Google what caused the mid-May slump. It's only off about 10 points but it looks more significant given the broad uptrend. The best I could scrounge was Iraqi-US tensions after an Iraqi plane struck a US ship in the Gulf. Fun quote from the Iranian Prime Minister, Hossein Mousavi:
  

   He reiterated the standard Iranian view: The incident 'shows that the Gulf is not a safe place for the superpowers and it is in their interest not to enter this quicksand.'

• On the 31st of August, more Iran-Iraq conflict seems to be the cause of the pullback from the record highs. From the NY Times, 9/1/87:
  

  Prices of crude oil and petroleum products rose in heavy trading as markets responded to Iraq's renewal of bombing attacks in the Persian Gulf.

Focusing more on the crash:

Spent more time than I'd like to admit trying to figure out how a plot legend works with subplots, and still failed. Red is S&P, green is volume (in 100 millions). Clearly, frantic unloading when the market starts declining. A sixfold increase in shares traded over 4 days clogged the market with sell orders and trading delays were imposed.
The weekend of the 16th-19th saw a 20% drop on news of a US oil tanker being hit by Iranian forces and money rushed into the safe bets. According to Hafer and Hein, some large sell orders on the S&P index from arbitrageurs put the S&P index at a discount to S&P futures. The discount triggered program trading to take off 16th and up to 47% of the volume in the last half hour came from program trades.
If you had 10k in the S&P index on Oct. 6th, by the 20th, you'd have less than 7k. In ten trading days. Ouch.

• CNBC has an old newscast from the 21st, fresh off 5% and 10% rebounds consecutively, that introduced me to late 80's business attire. More enjoyable is how nonplussed everyone seems to be after such a significant crash, but that might be because I'm tired of hearing about Cyprus sending the Euro-zone into depression.

I want to look at trading volumes after major dip days in a series titled, "Redundant Efforts". Have to start somewhere, right?

S&P500, 1980-87

Backtracking on the S&P500 seems as good a place to get started as any. I'll start in the 80's and work forward. Some noteworthy points:

• Peak-to-trough, the market was off -20% from '81 to midway through '82. The cause, as I read it, was Volcker raising interests rates to set back inflation, which had hit around 13% in '80.

• The LBO era of the '80s and a surge of IPOs(200 in '81 to 450 in '83) helped drive the market to new highs from 84-87. The explanation from Hafer and Hein, The Stock Market, is that the M&A activity took shares off the market. With demand going up for less shares, prices rallied. The resulting market tacked on 130% from '84 to the '87 high.