Act Two, Part 2.

January 6, 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. 

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.  

 

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 (January 27, 2019)

 

I Blew It! 

 

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.

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