Log Transform Update

December 4th, 2009 by Potato

Back in February, just weeks before the market bottomed, I did a quick post about the log transform, using the Dow as an example case. Here I’ve just updated my spreadsheet with what the market’s done in the last few months.

It has been a wild ride: half of the decline from the highs in 2008 have come back in just a few short months. Many people, myself included, have wrung our hands and worried that perhaps this is too much recovery too quickly, and we could be in for a (less severe) correction… but when you look at it, we’re still a bit below that long-term post-war trendline. So perhaps the crash was overdone, and the rapid recovery was what was needed to bring us back to “fair value”.

DJIA 1940-present with trendline

Rob Bennet has a guest post at Four Pillars today discussing the idea of adjusting your exposure to stocks depending on where the markets are relative to this long-term trendline. Edit: sorry, he’s using a different measure, but it’s still a related concept.


One Response to “Log Transform Update”

  1. Doctor Stock Says:

    The markets always tend to overreact – often because investors are driven more by emotion than fundamentals. Nevertheless, we can’t underestimate the power of emotions!!