Mention bear markets and to many of us it conjures images of crashes such as the Black Monday Crash of October 1987 or its more famous cousin, the Black Tuesday Crash of 1927. The reality, however, is quite different. Major bear markets, those declining more than 28%, sneak up on us. I discussed as much in a previous blog[1] and it is illustrated by the chart below, which shows little movement in the first two weeks of trading for the major bear markets taking place in 1937, 1946, 1962, 1968, 1973, 1987, 2000, and 2007[2]. 


In fact, except for the bear markets of 1937 and 1987, there are no precipitous drops in the first 30 days of trading. Let's call that Act one. Thereafter, while the trend is decisively downward, the road is not a steady downward plunge. Instead, it is a series of dead cat bounces each opening the door for more subterranean levels. The 1987 and 1937 markets behaved similarly. They just began their dead cat bounces early. As indicated by the chart below, the remaining markets tended to bottom out right around the 30-trading day marker denoted by the red arrow. They quickly gained for the next few weeks topping out somewhere between trading days 40 and 50. 

Our recent two bear markets are illustrative. In 2000, the S&P 500 bottomed October 18, trading day 32, at 1305.79 or 12.3% down. It recovered for the next two weeks gaining 6.4% (from the bottom) by trading day 45. Similarly, in 2007, the S&P 500 bottomed at 1406.1 November 26 for a 10.8% loss on trading day 31 and gained 3.8% from that bottom by trading day 41.


Act two opens with that short dead cat bounce soon to be followed by at least two other dead cat bounces in quick succession. I realize it is difficult to follow all the charts at once but focusing on each individual market will trace out the pattern. Once again let me illustrate with the past two bear markets. 


By November 30, 2000, the S&P 500 had dropped 15.4% by trading day 62. It went on to gain 7.3% from the 1294.9 mark it…

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