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1994issue C011-5

Monthly drawdown limits when cash competes with equity

A cash large-cap record from January 1965 shows that most months print some decline from the prior month-end close to the lowest daily close. Standalone valuation did not map the next month's drop. A competing-yield-ratio below 0.3999 marked a higher same-month incidence of sharp-drawdown, and seasonal-bill-lift into the fourth quarter can compress that ratio.

  • Across 344 months from January 1965, 83% of months on the cash large-cap index posted some decline from the prior month-end close, so a monthly-drawdown bound belongs on that close-to-low path rather than on the month-end print.
  • Among months that still closed higher than the prior month-end, 19.4% printed a close-to-low decline of -2% or worse, and close-only figures understate what intraday lows would show.
  • Next-month drawdowns showed little mapping to standalone index price-to-earnings or standalone equity yields, while a competing-yield-ratio below 0.3999 coincided with a same-month decline worse than -5.6% in 26.67% of those months.
  • Calendar-month averages of three-month bill-rate changes rose into the start of the fourth quarter from the mid-1960s through the early 1990s, a seasonal-bill-lift that can compress the competing-yield-ratio.
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Current trackDrawdown limit68 readingsSeasonality analysis85 readingsIntermarket analysis194 readings

The month is a close-to-low path

A monthly-drawdown is the percent change from the prior month-end close to that month's lowest daily close, measured on cash index prices. Across 344 months from January 1965, 83% of months on the cash large-cap index posted some decline from the prior month-end close.

Over that 28.7-year window the mean monthly close-to-low change was -2.44% and the median was -1.68%. In 22% of the months the close-to-low decline reached -4% or worse. October 1987 produced the sample's worst monthly close-to-low decline at -30.14%.

A higher close can still hide a decline

Among months that still closed higher than the prior month-end, 19.4% printed a close-to-low decline of -2% or worse. Close-only figures understate what intraday lows would show.

A positive-drawdown month is a stricter case: the lowest daily close still sits above the prior month-end close. Finishing the month higher is not the same test as never printing a monthly-drawdown.

Cash versus equity income marks the sharper months

Next-month drawdowns showed little mapping to standalone index price-to-earnings or standalone equity yields, with large drops appearing across a wide span of both readings. October 1987 sits as an outlier on the valuation scatter plots.

The competing-yield-ratio is equity-market yield divided by the three-month bill rate, used as a cash-versus-stock regime marker. When that ratio sat below 0.3999, a same-month decline worse than -5.6% occurred 26.67% of the time. That incidence fell as the ratio approached 1.

A sharp-drawdown is a monthly close-to-low decline worse than one standard deviation below the sample mean, set at -5.6% in this record.

Bill rates historically firmed into autumn

Calendar-month averages of three-month bill-rate changes from the mid-1960s through the early 1990s rose into the start of the fourth quarter. That seasonal-bill-lift is the historical tendency for three-month bill rates to rise into the start of the fourth quarter, and it can compress the yield-to-bill ratio.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
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19941-10 pp.Next on Drawdown limitKeep constant leverage left of the equity peakLeverage is position notional divided by trading equity, and a constant-leverage-rebalance resets that multiple every day after both gains and losses.
All readings on this track · 22 readings
  1. 1992Probability stops from winning-trade drawdowns
  2. 1994Monthly drawdown limits when cash competes with equity
  3. 1994Keep constant leverage left of the equity peak
  4. 1995Evaluate mechanical systems as a three-way fit test
  5. 1997Limits as a single trading decision procedure
  6. 1998Drawdown limits before a trend system is allowed to trade
  7. 1998Evaluating trailing stops as two-parameter loss filters
  8. 1998Walk-forward evaluation of a noise-filtered bond-futures breakout
  9. 2002The pattern-day-trader equity floor as a leverage governor
  10. 2003Evaluating a one-rank mutual-fund switch
  11. 2004Keep entry, exit and abstention balanced as one procedure
  12. 2006A stated daily multiplier is a risk contract, not a return promise
  13. 2007Walk-forward probation for intraday systems
  14. 2008A mechanical futures procedure is unfinished without a drawdown limit
  15. 2010Evaluating mechanical index timing under drawdown limits
  16. 2013Predefined small losses outrank market analysis
  17. 2013Equity-curve filters as drawdown brakes
  18. 2014Critique of chasing recovery after a large drawdown
  19. 2015Loss thresholds and equilibrium as trade filters
  20. 2015Constructing mechanical systems under a drawdown cap
  21. 2018Evaluating system rules for robustness and livable drawdowns
  22. 2020Regime-aware equity halts and volatility entry filters
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