The market always seems to find a way to follow the historical script. Just two weeks ago, as discussed in my blog Shades of 2000, the market seemed poised to go off script as it inched just above the -2.6% mark from its January 26 high. As discussed in my blog Not Out of the Woods Yet, major bear markets always drop before roaring back one last time. In the past, if you take out the 1929 market which was short of its initial peak by 7.4%, this last rally took the market within 2.6% of its previous high up to 2.9% above it. All major bear markets that, like us, had a correction prior to its last rally took at least 2.9 months from the first to the second peak. For us that would mean sometime after April 20. Therefore, the market was threatening to go off early.
Who would have thought that international trade would come along to nudge the market back into track? But that is just what happened thanks to President Trump's tariff rhetoric. I guess Roseanne Roseannadanna was right - if it's not one thing, it's another. Worries about the Fed raising rates three more times instead of two persist, and Facebook’s snafu added to the mix of bad news. There is a lot of uncertainty with a new leader at the Fed helm, Jerome Powell. Still, the Fed’s statement, after raising rates the expected 0.25% this past Wednesday, March 21, held no surprises. And Facebook is just one stock, although it spread a bit of contagion fear among high flying techs. So, the main contributor seemed to be worries higher tariffs would drive corporate costs up while a tariff war would make U.S. products more expensive and less competitive overseas. Both of those would impact corporate bottom lines.
Back on Friday, March 9, when the market inched up to within 3% of the January 26 peak, I warned that the Dive chart had not yet regained its lower channel and there was every chance the market may dive again. This Friday’s Dive chart, March 23, shows the market never regained its lower channel so this past week’s drop was not surprising.
Nevertheless, I am concerned about the market’s move in the interim. On Tuesday, March 13, the S&P 500 actually rose above the -2.6% mark with its intraday high of 2801.90. That came within 2.5% of the January 26 market top. I am somewhat reassured by the fact that the -2.6% mark is only the low point of the range and that the market could top anywhere between that and +2.9%, i.e. the market seems to still be on script. Still, the big drop we saw this past week gives me pause. As I mentioned in Shades of 2000, most previous major bear markets, after the big drop from the first peak, had pretty much a steady march back up to the second peak. They usually did not recover and then drop back down below 10% of the first peak. Is it possible the market did go off the historical script and that it’s March 13 high was the second peak top after only 1.6 months?
I stated major bear markets usually don’t drop below 10% of the first peak because there was one exception – the 2000 market. It seems those shades of 2000 are still on. I did an S&P 500 comparison with that year’s market. The orange trace for the chart below belongs to the 2000 market with values on the left-hand side. The blue trace is today’s market with values on the right-hand side. As it turns out, the 2000 market also dropped below 10% of the first peak about the same time. The intraday low of day 42 after the first peak in 2000 was 12.4% below the high as compared to the earlier low, which was 13.7% below. So far, we are on day 39 and already 10.0% below the high, which is higher than the 11.8% of the previous low.
Could we have seen the second top on March 13? Possibly. I think it is far more likely that we are still on script and will see a second peak at least a month away. Having dropped this far, it will likely take time to build back up to the second top so odds are it will be on the high side of the 2.9 to 5.4-month range.
As I see it, this ship will turn around and rally, but likely just short of the January 26 top. After that, get ready for a long bear winter.