Bear Markets and Bear Market Rallies
CNBC has 50 guests a day coming out and saying that this is “THE” bottom, Kass comes out and calls it a “Generational Bottom”, and investors that are flat or short are wondering if they are missing the boat.
In times like these it helps to put things into perspective. One of the ways we do this is to compare our current situation with similar times in history. As you will see in the following charts there is a good chance that you aren’t missing much at all.
This chart is of the current situation. We have marked each move of 20% or more. As you can see we have already had three rallies that were up 20% or more in a matter of weeks, or even days. If you had bought the top of the first 20% rally hoping to not “miss out” you would be down over 20%.
SPY-SP500 ETF
As you can guess this is not the first time that this has happened. Every extended bear market in history has had multiple 20% moves that have only sucked in the desperate traders only to burn them with a long fast fall back to new low. If you look at this chart of the 2000-2002 bear market we had four rallies of 20% or more before finally bottoming out and starting the 2002-2007 bull market.
SPY-SP500 2000-2002
Going back farther here is the 1962-82 bear market. Here we are using the Dow and the 20%+ swings are shown in the bottom pane where a reading of 1 means that there was a rally of 20% or more and a reading of -1 means that it fell by at least 20%.
Dow 1962-72
And finally we have the Great Depression. Looking at the lower pane we can see that there were several different 20% or greater swings.
Dow Jones 1928-1940
The market loves to fake us out. Bear markets are always more volatile than bull markets and this one is no different. While this could be THE BOTTOM we tend to think that it is A BOTTOM and we are currently short.
So you may be asking what would need to happen for us to change our minds? The simple answer is higher highs and higher lows, also known as an uptrend. Other bullish signs would be economic indicators that actually improved instead of worsened, improved and sustained breadth, and some actual leadership. By the way, banks will not be the new leaders.
Happy Trading,
The Macro Trader
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