October and December have been devastating for stocks. It wasn’t until Friday though that we officially reached the depths of a bear market.
There are different theories, the most common is 20% pullback in an index. As readers of this blog are aware, I follow a slightly different definition, based on Jack Schannep’s work. Based on this definition, a bear market is official when two of the three major indexes (Dow Jones Industrial, S&P 500 and Dow Jones Transportation) reach a 16% decline of the most recent high. For the mathematically inclined, the 16% is not random – simply it takes about 19% gain off the bottom of a 16% decline to reach the same level. Thus, a bear market is official at 16%, and a bull market – at 19%.
Friday was significant on these metrics. Here is the situation on the S&P 500:
This has the following output:
The current pullback is the first 16+% correction since 2008. The story is the same on the Dow Jones Industrial:
And slightly different on the Down Jones Transportation:
This is certainly the most cherished bear market in US history, but that won’t make it less painful or less damaging. A recession does not always follow a bear market, but does quite often. How often – check Jack Schannep’s book. There are a few interesting statistics, like the average bear market decline and duration. Let’s take the S&P 500 (history from 1950) and do the math:
A gloomy picture. The average bear market is 33%, the median bear market – 28% and the smallest – 19%. In other words, if history repeats itself, there is more pain to come. Significantly more on average.
The last piece of the puzzle (mine puzzle, Jack Schannep has a lot more), is to check the market for oversold signs. For this, Schannep has proposed a simple, yet powerful, indicator to forecast market bottoms. It was extremely precise in the 2011 pullback. Here is the code:
The above table shows that there is no extreme selling in the current recess. All in all – more troubles ahead.
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