Act Two, Part 1.

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.

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 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 hit that day just 7 trading days later. Thereafter, it went on to a lower bottom of 1254.07, 18.0% from the top, eight trading days later before rising 7.7% by trading day 85.

The S&P 500 went on to a lower bottom of 1270.05 January 23, 2008 - a 19.4% drop from the top - on trading day 70. Over a month and a half later, on trading day 93, it rose 5.4% from the bottom on February 26. Within two weeks it bottomed again, this time at a higher 1272.66 for a 19.2% drop on trading day 102 before rising 7.8% from the bottom 19 days later before resuming its decline.

Should it be that our market is following a similar trajectory, that this is Act two of a major bear market, there might be some profits to be made as it makes these short-lived recoveries. As the charts above show, the current market is closely shadowing seven of these major bear markets. It had a whisper quiet first 10 trading days after the September 21, 2940.91 S&P 500 top, only declining 1.9% by the October 5 close. Volatility rose up with a vengeance thereafter as it dropped to 2603.54, an 8.9% decline, by trading day 26 but charged to an 8.1% gain by trading day 33 - the first dead cat bounce - much like the other markets. The market has subsequently declined in steady fashion until today, closing at the lowest point since October 9, 2017. At its intraday low it stood 14% below the top. Perhaps the market will follow the same pattern as those closely correlating bear markets and halt the decline somewhere around 18 to 19% allowing for a short 5-7% profit window.

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