Act Two, Part 2.

Sunday, Jan 06 2019 by
4

January 5, 2019

Having established the trend in Act Two, Part 1, let us now look at the detailed data behind the charts in that blog. One thing to keep in mind is that the market from 1962 to today was measured using S&P 500 data from Finance.Yahoo.com. This data has daily highs and lows so market tops and bottoms could be measured using intraday highs and lows. By contrast, market data from 1962 and before used Dow Jones Industrial Index data accessed from Wharton Research Data Services[1], which only provides daily closes. Therefore, highs and lows refer to closing and not intraday highs and lows and as a result, will show much lower volatility than otherwise. 

The table below summarizes the data for the first bottom and top - a point that marks the beginning of Act Two. As can be seen, all but one market bottomed initially between trading days 27-35. The only exception was the 1987 bear market. This was a market in a hurry and would be back to par 438 trading days later - a year and eight months. It bottomed initially on day 12 with a whopping 34.2% loss and recovered quickly the next day for a 19.8% gain from the previous day's low. Taking out that outlier, the average first bottom came at 30.9 trading days, while the average first top came 8.4 trading days later. The average first loss was 12.4 percent without the 1987 data and gave rise to a gain from the bottom of 6.3%. Our own market lines up fairly well with the major bear market data. It bottomed initially 26 trading days after its September 21 S&P 500 highpoint of 2940.91. It peaked seven days later with an 8.1% gain from the bottom. 

 

Bear Market

Days to 1st Bottom

Percent Loss

Days to 1st Top

Percent Gain from Bottom

1937

28

22.2

31

5.0

1946

31

7.3

45

4.7

1962

32

10.8

34

5.0

1968

27

10.8

36

5.4

1973

35

10.1

42

5.6

1987

12

34.2

13

19.8

2000

32

14.7

45

10.2

2007

31

10.8

42

8.4

Average*

30.9

12.4

39.3

6.3

Today's

26

11.5

33

8.1

*1987 not included


All major bear markets went through two additional short recoveries or "dead cat bounces" in the first 151trading days. The two tables below summarize the data for these second and third bottoms and tops, respectively.  

 

2nd Bottom

2nd Top

Bear Market

Trading Days

Percent
Loss

Trading Days

Percent Gain from Bottom

1937

43

33.6

52

10.1

1946

71

21.6

76

5.9

1962

52

25.6

53

14.5

1968

52

17.5

69

9.5

1973

49

11.8

53

5.4

1987

16

30.9

25

13.2

2000

62

15.4

69

7.3

2007

70

19.4

77

9.9

Average*

57.0

20.7

64.1

8.9

Today's

64

20.2

71(1/4/19)

8.2

*1987 not included


 

3rd Bottom

3rd Top

Bear Market

Trading Days

Percent 
Loss

Trading Days

Percent Gain from Bottom

1937

68

40.0

86

14.4

1946

85

22.6

89

7.9

1962

70

28.1

112

17.5

1968

80

14

90

5.3

1973

58

11.7

63

5.8

1987

44

32.7

66

18.1

2000

77

18

103

10.3

2007

107

20.2

151

14.6

Average*

77.9

22.1

99.1

10.8

*1987 not included


Once again, the 1987 market was well ahead of the other major bear markets and its data was excluded from the average calculations. Although most of the other markets were somewhat in sync for the first bottom and top, they diverged after that with second bottoms coming in a 43-71 trading day range and a 57 trading days average. The average loss was 20.7% but this was skewed by earlier data and all second bottoms after 1962 came in below bear market territory. Recall that the 1937 and 1946 reading were done using Dow closing data, which minimized the losses and gains. Recoveries varied in duration. Some were quite short, lasting 4 or 5 days, with one lightning quick (1962) topping out the next day. The average was 7 trading days or about a week and a half. 

Third bottoms and tops had even greater divergence ranging from as early as 58 days to as late as 107 trading days. There was even greater disparity in duration. Although, much like second bottoms, a couple topped out with 4 or 5 days, the average duration was 21 trading days. The 1962 and 2007 markets took exceedingly long times to top at 42 and 44 trading days, respectively. In general, third bottoms were slightly lower than second bottoms with a 22.1% loss the average. As before, the data was skewed by the earlier markets with only the 2007 market reaching bear market territory after 1962. In general, gains were slightly higher for the third top with a 10.8% average gain from the bottom. 

Our current downturn seems to be following the major bear market's trend. It seems to be in the midst of a recovery from a second bottom, which took place a bit on the long side at 64 trading days and hit bear territory for the first time since 1962. At Friday's high (1/4/19) it is 8.2% above the December 26 bottom. At 7 trading days after the bottom, it is right at the average for the duration, so the odds are the rally has mostly run its course. Should today's market continue to follow script, we should see a third drop within the first one to five weeks after the top. 

One last note, no major bear market beyond 1937 has been in bear market territory by the 129-trading day marker. Even the ever in a hurry 1987 market had briefly crept above by then. Therefore, if our market continues to follow script, any incursion into bear market territory before then, the first week in March for us, could potentially lead to quick profits from the short-lived recovery. These could be as high as 10% and may take as long as two months to develop or be a done deal in a week.   

UPDATE

Don't you hate it when you miss a move you had a heads up on? Well, I certainly did. Amidst the busyness of the end of the academic semester and the holiday season I missed the second bottom from this market's potential Act 2. It was only in retrospect, when this rally went beyond the second top's normal range, that I discovered it. 

As I mentioned above, taking out the anomalous 1987 market, no second bottom since 1962 has gone into bear market territory. Moreover, the average recovery is only 8.9% with no market going reaching 10% since 1962. Those two data points should have made me think twice as the rally from the December 26 bottom went beyond the second week. It was only when the rally cleared 2600 for the S&P 500 and an 11% gain from the bottom that I took a second look at the data. It showed a second bottom of 2631.06 November 23, right around Thanksgiving, on the 44th trading day. This was early for a second bottom, the average is 57 trading days, and at -10.5% it was well short of the average loss, -16.0%, since 1962. Nevertheless, the rally from this bottom was right on the money in terms of gain, 8.1%, and duration, 7 days, for major bear market second bottoms of 8.9% and 7 trading days. 

Taking that bottom and recovery into account, the data for our current bottom and rally makes more sense. The average third bottom drop is 22.1%, taking place around the 78th trading day with a duration of 21 trading days to the rally top. As mentioned above, two markets took over 40 days to top. The current market bottomed at 20.2% on trading day 65. Last Friday would have been the 20th trading day after that, so we are still on topping range. While we have exceeded the average recovery of 10.8%, it should be noted that, as recently as 2007, the recovery was 14.6%. From the S&P 500's December 26 bottom of 2346.58 that would mean a 2689 top, which we have yet to reach. The highest we have gotten was two Fridays ago, January 18, when it peaked at 2675.47. Curiously, back in 2007, the market was rallying from its -20.2% third bottom at a steady clip that saw no setback of 1% or greater for 18 trading days. It hiccuped at -1.8% and then topped 3.4% higher 8 trading days later. We had just gone through 11 trading days with no loss greater than -0.53% until the -1.42% snag this past Tuesday, January 22 - the day after our latest high. Even Tuesday's low placed still meant an 11.5% gain from the bottom and only 2.7% from a 2689 top. Will this market follow history and the 2007 bear market's footprints? We will find out in a week.  

  

[1] Wharton Research Data Services. "Dow Jones " wrds.wharton.upenn.edu, 05/31/2018.


Filed Under: Market Outlook,

Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


Do you like this Post?
Yes
No
4 thumbs up
0 thumbs down
Share this post with friends




2 Posts on this Thread show/hide all

aflash 8th Jan 1 of 2

This is an excellent road map.

As events unfold the Treasuries and Dollar have come off, parly due to the Fed softening its rate-rise rant but Gold and Oil also seem to have run their short term course. Equities reaching resistance levels, except maybe for transports, perceived slow-down coming.

All temporary stuff.

What concerns us all is the possibility of serious loss of value à la façon de la Financial and Dot.com busts.

An excellent piece of research by bill@technicaltrader.uk concluded that the approximate 20% drop level acts as Support first and then as Resistance prior to 35-50% drops.

Called 'some thoughts on Bear Markets from a technical perspective', he might have a copy for you although it dates from Feb 2016. I would post it but the charts do not work here. E-mail him or private message me and we can take it further.

 Bonne chance.

| Link | Share
dejekarl 9th Jan 2 of 2

Thanks, Aflash. That sounds like an interesting read. I would be relieved to find a drop of 35-50%. Sadly, my own research indicates at least 50% although lower would sure be better.

| Link | Share

What's your view on this thread? Log In to Comment Now

You can track all @StockoChat comments via Twitter



Stock Picking Tutorial Centre



Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis