Straits Times Index Tumbled 30%. Should You buy the Dip Now?

As what I have promised in the previous post (titled Stock Market Indexes have Crashed More than 30%. Should You buy the Dip Now? where I provided an analysis of how the S&P500 had perform historically after a 30% crash), here is how the Straits Times Index (SGX:STI) had performed historically 1 year after a 30% crash from a recent high. Unfortunately the historical data only dated back to 1987 and there are only 4 instances where STI fell more than 30%.

I would like to highlight here that I do not consider this a statistically significant result given that there are only four instances. To some of you, 4 instances may be good enough so you should perform your own due diligence. In addition, this is an analysis on STI and no inference should be made regarding the performance of other stocks (include its components).

The average returns are actually quite attractive as compared to the returns for S&P500. For the latest 2 instances 2003 and 2009, the returns after one year were more than 50$. Wow! Probability of a positive return is 75%. But the only negative return was quite disastrous, a loss of 32.15%. That was during the Asia financial crisis in 1997. Maximum drawdown was a whopping -46.22%

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Now, what if I simply wait for a while before entering the market? Here is the result if I were to wait for 1 month.

Here is the result if I were to wait for 6 months.

Both results were not as good as the first case where you buy immediate after a drop of 30% but the result for 1 month wait was quite close.

Would DIYQuant buy the dip now?
Like I said, there are only four instances and hence for me, the outcome is inconclusive. I often perform such analysis in order to find new strategies to add to my current quantitative model and a lot of times, the outcomes turned out to be inconclusive like for this case. My current MATA analysis to track market trends is way more accurate as it has been back-tested with much more historical data.

But this result does give me an idea of the potential return I could get in a year if I were to buy the dip now. Perhaps not integrated into my quantitate model bust as a separate fun fund. So if I really were to invest based on this result, perhaps one way I can think of would be to invest a fraction of the capital. If, unfortunately I were to hit the 1997 instance where the market fell another 30%, I will average in the other part of the capital. Of course the assumption here is that market will alway rise eventually. Follow me on Facebook or via email to get more of such analysis.

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