We may be seeing green shoots or maybe they are yellow weeds as Roubini suggests. To me that’s all noise and I wonder why so much of the blogosphere and media is full of speculation on such matters. As even the best economists have a poor predictive track record, why should an average punter like me even bother thinking about it? There are easier and more profitable things to think about, but each their own.

Perhaps some people will ask why bother looking at historical market data. My simple answer is big picture reassurance. The main reason is that I do not want to get bogged down in the here and now of unemployment reports and the like, such stats are psychologically damaging and cloud the mind. They induce fear and you don’t want to go there.  The conspiracist in me believes they are promulgated to confuse poor investors and make them freeze instead of act. I say, stand on giants shoulders to get a better view of the future so that you may act now.

According to most people worth listening to the stock market is in the fairly valued ball park.  Jeremy Grantham recently said there was about 30% chance of the market making a new low. Through options trading I’ve learnt there is a big difference between something happening during a time period and the same thing occurring at the end of the period. While the market may be down sometime within the next year the chances of it being down in a years time are significantly less than 30%. Does it really matter if the market makes a new low within the next six months if it ends up higher in a years time? How long is your investing horizon?

I find a lot of market statistics frustrating as they often refer to financial or calendar years. As I don’t invest based on either financial or calendar years I decided to look at some market stats from the perspective of how I invest, as if I invested today or tomorrow or any day.

I spent some time over the weekend looking at S&P 500 historical daily data back to 1950. I started by looking at where do we stand today. The market has been down every day year on year (YoY) since Jan 4 2008. It has been down for two years YoY since Jan 5 2009. We’ve now had two down years for the last 130 trading days. If the S&P is below 927 on 4 Jan 2010 that will make it three down years in a row.

So what are the chances of having a third down year? What does history tell us? Since 1950 the probability of three down years starting from any day in that period is 1 in 93 or 1.1%. That’s 159 days out of 14,726. If those odds aren’t good enough to get you back in the market then consider this, 150 of those days with three down years in a row occurred between Nov 2002 and June 2003. If, like me, you think that was a rather special period with a very special starting point then you may choose to exclude those days. That sends the odds skyrocketing to the chances of the market being lower in a year to 1 in 1635 or 0.06%. Do you like those odds?

Some more stats. Out of the almost fifteen thousand trading days since 1950, 29% were down YoY, 71% were up. The stat I like the most is that there has never been four down years in a row. So if the economic malaise outweighs historical stats and the market is below 927 next Jan then back up the 16 wheeler, it’s time to load up.

There have been 4,665 days or 31.7% of trading days which had three years in a row of up days, YoY.

We all know there’s lies, damn lies and statistics so perhaps I should add some balance. Today is not just any old market day. We’re in one of those infrequent periods of two down years. So maybe, just maybe we should take a gander at how things transpired in similar periods. The good news is the market went on to average a 12.5% gain in the following year. If you’re fully invested and prefer to live in denial then I look away now.

Since 1950 the S&P500 has ended up down one in five years following a two year decline, or 19% of the time to be more exact. Those down years are skewed towards badly down. I’m talking crushed spirits. Down 20-32%. Could you stomach that? For the optimists, let me say that the odds are still clearly stacked in our favour. The market has been up four out of five years following two down years, 81% of the time the market has been up. While the up returns are more evenly distributed than the down years they are also larger on average.

After looking at history I may have to recant my statement of significantly less than 30% probability of a down year ahead. History tells tell 20% looks about right.

Since October 2008 I’ve been suggesting people should start averaging back into the market. In February and March I was recommending aggressive investing. My friends keep asking me “How’s that working out for you?”, I’m not sure they believe me when I say really well. Therefore, this week at Fusion Investing I’ll show the returns experienced by an investor who has averaged into the market since October 2008. I’ll also share my long term market outlook and why I’ll continue to invest new money into the market. Then maybe, just maybe I’ll go back further in time to look at some stats since the late 19th Century.

NOTE: Definition of down years may not be what you intuitively think. One year occurs when a day is down YoY. Two down years occurs when a day is down YoY and the year ago day was also down YoY. I’m sure you can figure out what three down years represents. Perhaps I should have used first, second and third, instead of one two and three.

Part Two: Historical S&P 500 Data 1871-2009
Read More: Past Headline Articles at Fusion Investing

Related posts:

1. S&P 500 Update – Six months of Positive YoY
2. Digging Deeper into the Data 1871-2009
3. Three Months of Gains go Poof