I decided to take the chart of actual observed values of Nasdaq ROC over the past 10 years and apply a power law curve to it. I remember reading somewhere that Mandlebrot estimated a power law shape factor of 2.7 for cotton prices when he was first fooling around with fractals. I found that the Nasdaq has a shape factor of 2.87 that mimics the selloffs.
This curve makes sense to me because most of the selloffs are minor and reside in the 0 to -1% range. The biggies, like a -9% selloff are very rare and reside in the “long tail” section. This can work to your advantage, if you are a long term investor. You should be a buyer when you see a long tail selloff!
This makes me consider making a few changes to my S&P500 Volatility Timing Model. Hmm.