A 21% Chance Of A 50% Plunge In The S&P 500?

Tyler Durden's picture


Investors' perceptions of risks, both normal (volatility) and tail (event), have intriguingly run to both extremes at the same time. 'Normal' volatility has been so suppressed by Central-Bank action as to become an almost useless indicator (or at best contemporaneous) - or as Artemis Capital notes "volatility has become a shadow currency" with the USD (safe-haven) becoming considerably more correlated with volatility. Extreme volatility concerns are where the 'unintended' consequence has appeared. In a somewhat stunning market realization, options markets currently suggest a 1 in 4.7 chance of a greater-than-50% drop in the S&P over the next year. That is more likely than the lifetime risk of a heart attack. The question then is, are tail-risks over-priced? Or are investors willing to overpay for that kind of 'deflation' insurance since we now know that the impossible is possible!


[look at the skew of the distribution of returns since 2008 - the light blue section - show upwardly biased it has become...]


and through time... the chart below shows the chart above through time, and the rise in extreme tail risk pricing since the crisis began...


Source: Artemis Capital Management

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Mon, 11/05/2012 - 16:23 | 2949604 Precious
Precious's picture

Imagine that.  Just about the time everyone runs out of savings.

Mon, 11/05/2012 - 16:30 | 2949628 ratso
ratso's picture

Turns out the prudent investor already knows this.  A 20% down move at any time is always in the cards - but this is followed by a stronger recovery if you can wait it out.

Mon, 11/05/2012 - 16:33 | 2949644 Spastica Rex
Spastica Rex's picture

Now is always the best time to buy. Stocks only ever go up, long term.

Mon, 11/05/2012 - 16:36 | 2949661 El Viejo
El Viejo's picture

Are you MDB in disguise??


Mon, 11/05/2012 - 16:36 | 2949665 Spastica Rex
Spastica Rex's picture

I was being droll.

Mon, 11/05/2012 - 16:39 | 2949675 francis_sawyer
francis_sawyer's picture

90% of market moves are half mental...

Mon, 11/05/2012 - 17:20 | 2949819 JPM Hater001
JPM Hater001's picture


Mon, 11/05/2012 - 17:57 | 2949924 francis_sawyer
francis_sawyer's picture

One good look at that 3-D chart confirms your thesis...

Mon, 11/05/2012 - 18:26 | 2950003 flacon
flacon's picture

Can I go long adrenaline? This is going to be the age of panic!



Mon, 11/05/2012 - 20:18 | 2950356 Catflappo
Catflappo's picture

83.48976% of statistics are not accurate

Tue, 11/06/2012 - 00:29 | 2950941 crusty curmudgeon
crusty curmudgeon's picture

92.175% of all statistics are made up on the spot.

Tue, 11/06/2012 - 03:15 | 2951100 savagegoose
savagegoose's picture

115% of statiticians, are full of shit

Mon, 11/05/2012 - 20:56 | 2950450 stocktivity
stocktivity's picture

Thanks Yogi

Mon, 11/05/2012 - 17:06 | 2949701 Muppet of the U...
Muppet of the Universe's picture

ACtually today was a great time to buy.  I kept saying buy, and making fun of zh b/c I just know they have tons of s&p put options options.  They got mad at me again.  :/

I would say it is a good day, b/c I think this is the bottom for aapl, the end of the bond weakness, and the return to that retarded, upward waveey chop.  Followed by dull upward fed manipulated drag.  But this time far weaker, and shorter, and after this?  Who knows, maybe market will PZlata!  Still I'd say there is a 20% chance of a 400 pt dow drop and a 5% chance drop of a 1000 pt drop, and 3% chance of 50% drop.  20% 50% drop?  LOL, they must think ppl are idiots.. o wait...  Even still QE is pretty much out of steam, and everyone knows it.  There is still a strong chance that market will fall less dramatically b/c market is heavily monitored by ppt and hft.

What I'm worried about is the huge distortion between aapldaq and es/ym

The entirety of today wreaks of manipulation.  Bonds skyrocketting 3-4am for on a weaker signal, then forcing the market's hand, and artificially keeping it up there.  Then the nas explodes past other indexes like its bull market times again...  All when aapl is finding support and bonds are getting bullish?  Someone centrally planned today..

Mon, 11/05/2012 - 17:47 | 2949898 dogbreath
dogbreath's picture

wow, thats interesting.  what do you think of man made global warming

Mon, 11/05/2012 - 16:48 | 2949693 crusty curmudgeon
crusty curmudgeon's picture

I think I know MDB well enough to say that this is what he'd tell us:

Only fools worry about stock prices.  Buying and holding is the best strategy for long-term growth.  Fret not about little ups and downs.  Make sure you exercise your right to vote for Rep or Dem and don't waste your vote on a 3rd party.  Best to support the candidate that believes in job growth and responsible government and the one that will fight for the working man.  Then he'd point out that the stock market is up right now and that proves all of this to be nonsense.

Mon, 11/05/2012 - 19:16 | 2950171 Umh
Umh's picture

He's counting on inflation. If I had the money I have now in 1929 I'd have been a rich guy.

Mon, 11/05/2012 - 16:36 | 2949658 vast-dom
vast-dom's picture

yeah yeah yeah and i've got bobby boy's SP chart at 800 by Sept of 2 MONTHS AGO. We could levitate like Japan or we could crash. We could print QE hopium prop up SP for years or we could 21% 42% 83% 12% % % % % % % % % % % % % % 

Flip a fucking coin. No one knows in rigged ponzi HFT greater fool of seemingly limitless pool of fools centrally planned oligopolisitc lack of markets markets.

Mon, 11/05/2012 - 16:39 | 2949676 Spastica Rex
Spastica Rex's picture

Perpetual foolery.

Mon, 11/05/2012 - 16:48 | 2949710 vast-dom
vast-dom's picture

see today's market levitation, on nothing but good cheer?


i had the crash Sept of last year. but i did not account for QEternity starting really with QE1.

Mon, 11/05/2012 - 17:14 | 2949793 SheepDog-One
SheepDog-One's picture

It really is such a huge 'face-palm' for so many people....we've had all these economists and all that nonsense for decades and all we really had to do was just IMAGINE up as much money as we need and it all just runs perfect forever! 

Mon, 11/05/2012 - 17:25 | 2949838 vast-dom
vast-dom's picture

I ever tell you about the guy who shat more than he ate? He was considered a marvel of science.

Mon, 11/05/2012 - 18:02 | 2949938 Al Huxley
Al Huxley's picture

That's right, if only somebody had discovered that the obfuscated under-the-table monetization of huge and ultimately unpayable debt is completely without negative consequences, they could have done this years ago.  But I guess it just took the brilliant minds running the FED and the other western CBs to come up with the magic formula.  Maybe they can get to work on perpetual motion next.

Mon, 11/05/2012 - 17:20 | 2949816 ratso
ratso's picture

Turns out the prudent investor already knows this.  A 20% down move at any time is always in the cards - but this is followed by a stronger recovery if you can wait it out.

Mon, 11/05/2012 - 16:24 | 2949607 CClarity
CClarity's picture

50% chance of a 21% plunge in the S&P 500 for just about any reason or none.

Mon, 11/05/2012 - 17:22 | 2949827 JPM Hater001
JPM Hater001's picture

You offer a good question: So what is likely in the 50% chance range?

Mon, 11/05/2012 - 17:42 | 2949886 JuliaS
JuliaS's picture

There is a 12% probability of me thinking with 33% certainty that this 6% specific article is 68% true.

Mon, 11/05/2012 - 16:27 | 2949616 madcows
madcows's picture

I'm all for it.  Such a plunge would confirm everyone's suspicions that the current state of the market has been massively impacted by the FED's actions.

Besides, I'm thinking we'd see a few Goldman Sax-ers jumping to their death.  And, that would bring a smile to my face.  May they reap what they have sown.

Mon, 11/05/2012 - 16:54 | 2949736 Yen Cross
Yen Cross's picture

We don't need a market plunge to confirm the Bernanke put. Just look at "Q-3 earnings" and "Q-4/ forward", guidance...

Mon, 11/05/2012 - 17:54 | 2949919 Bob
Bob's picture

We also don't have to wait for the Gold Sackers to jump.  Just sayin.

Mon, 11/05/2012 - 16:31 | 2949620 Kitler
Kitler's picture

98% chance of a 100% ass-raping after November 6th.

Mon, 11/05/2012 - 16:39 | 2949678 timbo_em
timbo_em's picture

But both nominees promised to cut the deficit, keep taxes low or even lower taxes and increase spending and either one wants to create 12 million highly paying jobs over the next four years. And you say there is only a 2 percent chance of that happening?

However, if one also considers the Fed's monetary policy, even 98 percent seem to be overly optimistic.

Mon, 11/05/2012 - 19:20 | 2950182 Umh
Umh's picture

Obama promised to get us out of the middle east too. All my Democrat friends seem to forget that bit.

Mon, 11/05/2012 - 17:15 | 2949797 zorba THE GREEK
zorba THE GREEK's picture

Sorry Kitler, I like your avatar, but I think you've got the odds wrong.

IMHO it's a 50-50 chance.

50% We get ass raped by a Democrat

50% We get ass raped by a Republican.

Mon, 11/05/2012 - 17:28 | 2949832 Kitler
Kitler's picture

50% + 50% = 100%

Same owners... Ass rape is guaranteed.

(There is a 2% chance of a giant meteorite etc. striking the planet however. We can always HOPE....)

Mon, 11/05/2012 - 17:38 | 2949877 Dead Canary
Dead Canary's picture

I'm still holding out on conquest and enslavement by aliens.

Mon, 11/05/2012 - 17:41 | 2949883 Kitler
Kitler's picture

Sorry. No Scientologists to vote for in this election.

Mon, 11/05/2012 - 16:29 | 2949624 Duke of Con Dao
Duke of Con Dao's picture

I think future Bishop of America Mitt Romney predicts this in the following vid: 


Mon, 11/05/2012 - 16:29 | 2949625 w00dmann
w00dmann's picture

Over the past year or so I have been feeling a bit like a zombie, kind of like Christopher Walken in that movie Dead Zone - I feel as if I know what the future holds, that some sort of World War III will soon be unleashed upon mankind, and that I seem to be the ONLY PERSON on the planet who knows this. I watch people go about their daily lives, smiling and joking, going to work, buying their lattees and iPads, not a care in the world, utterly oblivious to the impending financial disaster that seems sure to hit like a tsunami and ruin our lives. And yet...

Life goes on as before. The collapse never comes. Everything seems normal; even banal. And I start to question my perspective; will the collapse actually hit? Perhaps it is merely a mirage, and the governments of the world will somehow be able to do what they say and spare us from the devastation of a global credit reset?

In other words, how can there be such calm, peace and complacency in this world if the eye of the storm is threatening to barrell down upon us like a million tornados; perhaps the storm doesn't really exist?

It's like living in bizarro world, and it's driving me crazy. Things that you know MUST be true are obfuscated by a Great Hand. Anybody else feel like this?

Mon, 11/05/2012 - 16:36 | 2949643 Kitler
Kitler's picture

< Economic collapse is in our future

< Happy Days will go on forever

I have harbored the same thoughts for years now as well. Fortunately the precious metals and farmland porfolio I have assembled has been extremely kind to me.

Mon, 11/05/2012 - 16:36 | 2949663 blunderdog
blunderdog's picture

"This, this, THIS is how the fuckin' world ends, man!  Not with a bang but with a whimper!  And with a whimper, I'm gettin' the fuck outta here!"  --some photojournalist somewhere

Mon, 11/05/2012 - 17:24 | 2949835 Urban Redneck
Urban Redneck's picture

TS Eliot did it better, but original thought and journalism are mutually exclusive these days anyway...

Mon, 11/05/2012 - 17:35 | 2949869 Kitler
Kitler's picture

Dennis Hopper - Apocalypse Now.


Mon, 11/05/2012 - 16:35 | 2949655 TrumpXVI
TrumpXVI's picture

You're not alone, w00dmann.

Franz Kafka would have understood, too:-)

Mon, 11/05/2012 - 16:37 | 2949666 BoatDrinker
BoatDrinker's picture

w00dmann....probably one of the most poignant comments i've read on any comment section, relating to any subject matter.  but i suppose that is driven by the fact that i completely agree with your statement.

Mon, 11/05/2012 - 16:38 | 2949672 Karlus
Karlus's picture

Dude, I was like that last year. Got in to crazy prepping, mad bullets and the like. Then I got married and made a nice killing in the market.


You need to go outside and walk in the park. Listen to some birds. Get laid (prostie or otherwise)


Staying on ZH all day long will skew more than your normalcy bias, it will get in your head.


Stay balanced, brother.

Mon, 11/05/2012 - 17:00 | 2949755 ParkAveFlasher
ParkAveFlasher's picture

Nicely put. 

And may I add, keep stacking.

Mon, 11/05/2012 - 17:03 | 2949760 Kitler
Kitler's picture

You need to go outside and walk in the park. Listen to some birds. Get laid (prostie or otherwise)

 Staying on ZH all day long will skew more than your normalcy bias, it will get in your head.

 Stay balanced, brother.


But nothing can give you peace of mind more than being prepared for when shit happens.

And it will happen...

Mon, 11/05/2012 - 18:27 | 2950008 fonzannoon
fonzannoon's picture

It's one thing to get acclimated to a collapse. It's another entirely to think that this could be decades of financial repression that wipes people put one at a time. That is tough to prep for.

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