Posts filed under “Cycles”

Guide to Stock Market Corrections

 

The S&P 500 hit 1709 a few weeks back and has since been dropping precipitously, we are now down roughly 3.7% from that level in a short period of time. Heading into today, we’ve been negative 4 days straight and have seen losses during 9 of the last 11 days on both the S&P 500 and the Dow Jones Industrial Average.

Suddenly, everyone is talking about this being a correction. I would say that at the current moment, we are just barely in a dip but possibly headed toward a correction. Let’s first define some terms:

 

correction

 

With a market pause that is not yet even a 5% dip – let alone a 10%+ correction – people (myself included) have been jumping the gun in trotting out the C-word so early.

But for argument’s sake, let’s say we’re headed for a real correction…what should we expect? Today I’ll limit my remarks to price action and not get started into a whole discussion about news, valuations, or anything else.

A handy field guide to stock market corrections below (data via Dow Jones, Morningstar, Bloomberg):

* Since the end of World War II (1945), there have been 27 corrections of 10% or more, 12 of which had turned into full-blown bear markets (with losses of 20% +).

* This equates to one correction roughly every 20 months, according to Dow Jones index maven John Prestbo, who points out that this average does not mean they’re evenly spaced out. 25% of these corrections over the last 66 years occurred during the 1970′s (the Golden Age of Market Timers), another 20% occurred during the secular bear market of 2000-2010.

* The average decline during these 27 episodes has been 13.3% and they’ve taken an average of 71 days to play out (just over three months).

* From the beginning of the last secular bull market in 1982 through the 1987 crash, there was just one correction of 10% or more. Between the Crash of 1987 and the secular bull market’s peak in March 2000, there were just two corrections, according to Ed Yardeni. This means that secular bull markets can run for a long time without a lot of drama.

* Since the stock market’s bottom in March of 2009, there have been only 3 corrections: In the spring of 2010 the S&P 500 began a 69-day drop of roughly 16%. The widely referenced summer correction of 2011 lasted for about 154 days and almost became a bear market. The correction during the spring of 2012 set up one of the greatest rallies of all time, although it was barely a real correction, sporting a peak-to-trough drop of just 9.9% in just under 60 days.

* The most recent correction took place in 2011, between the end of April into the end of September. The Dow dropped roughly 16%. The S&P 500 actually dropped a hair over 20% before snapping back, leading some to believe that this was a bear market – the implication being that the current bull market is just 2 years old and not five years old (dating from March of 2009). I have no strong opinion on that debate.

* Bull market rallies in between corrections – and there have been 58 in the post-war period – tend to run for an average of 221 trading days before being interrupted and gaining an average of 32%. By this standard, we are way overdue for a correction (but in fairness, we have been for awhile).

* As to what we should do during corrections, I’d recommend maintaining a list of high-quality stocks you’ve been kicking yourself for missing out on and clearing the decks of any longs you don’t truly love. For those with time horizons longer than five years (most), the best thing to do is grit one’s teeth and do very little. If a correction of between 10 and 20% is unbearable to you mentally or financially, that means you’ve  either got more money than you should invested in stocks or you’re kind of a fairy. Make the adjustment you can live with and remember this feeling the next time you find yourself chasing the market.

* As to the question of whether a correction could become a bear market (or worse even, a crash), the answer is that this is always possible. But most corrections do not become crashes, and every single one of them turned out to have been great buying opportunities in the fullness of time.

* Lastly, remember your ABC’s: Always Be Cool.

Category: Cycles, Investing, Trading

Merrill’s Secular Road Map Projects S&P 500 2300 in 2017

S&P 2300? Give It Four Years: Ritholtz Chart Source: BAML   It took more than 13 years, but the S&P 500 managed to eclipse its 2007 highs of 1576 earlier this year. This move takes it out of a long term trading range, and according to the Technical Analysts at Bank of America Merrill Lynch,…Read More

Category: Cycles, Technical Analysis

Balenthiran 17.6 Year Cycle

Source: 17.6 Year Stock Market Cycle   Interesting take on the longer term Secular Bear Market Vs. Cyclical Bull Market, via Kerry Balenthiran: “My research has identified that a 17.6 year stock market exists within the markets consisting of downtrends lasting 2.2 years and uptrends lasting 4.4 years (2 x 2.2 years), with a combined cycle…Read More

Category: Cycles, Markets

Secular Bull Market Roadmap

Click to enlarge   We have not looked at this chart in a few quarters. Here’s Merrill: Secular bull market roadmap: The S&P 500 broke out to new all-time highs in April and has held this breakout. The retest of the prior highs in June confirmed the breakout (prior resistance acted as support) and this…Read More

Category: Cycles

Are Market Crashes Inevitable?

Is another market crash coming? Yes. When is it coming? That’s another question, and the real trick is figuring out how to be prepared for one while still working toward your investing goals. MarketWatch’s Mark Hulbert drops in on the MoneyBeat show to discuss.

Crash-Course Investing

Category: Cycles, Markets, Video

This Secular Bear Has Only Just Begun

This Secular Bear Has Only Just Begun Ed Easterling Crestmont Research, October 4, 2012     Secular bull markets are great parties. Investors arrive from secular bears really wanting to take the edge off. As the bull proceeds, above-average returns become intoxicating. By the time it is over, the past decade or two has delivered…Read More

Category: Cycles, Markets, Think Tank

S&P 500 at Inflection Points

click for ginormous chart Source: Standard & Poor’s, First Call, Compustat, FactSet, J.P. Morgan   Its time for the update of one of our favorite massive charts, via the quarterly Market Insights JPM puts out. (Yeah, I criticize Dimon but that doesn’t mean he doesn’t have some insightful people working for him). As you can…Read More

Category: Cycles, Markets

Weakest Part of Presidential Cycle

Market risk: Weakest part of Presidential Cycle starts in mid 2013 (Jul/Aug peak) click for ginormous chart Source: Merrill Lynch   From Merrill: 2013 is the first year of a new Presidential Cycle. The first quarter of the first year of the cycle is down 1.33% on average (1Q in 2013 bucked this trend), but…Read More

Category: Cycles, Investing, Markets

Market Performance & Government Shutdowns

  click for larger table Source: SentimenTrader.com   I have long been a fan of Jason Goepfert of SentimenTrader.com for some time now, and this sort of work is the exact reasons why.  

Category: Cycles, Markets, Politics

The Rise & Fall of Blackberry

Click for ginormous graphic Source: NYT

Category: Corporate Management, Cycles, Digital Media, Technology