December is usually a good month for stocks. Since 1928, the S&P 500 was up in December 74.4% of the time (green lines, chart below). When December ended down (red lines, chart below), the average loss was only 2.9%.
Every time stocks bounced from the December low into January. Twice, in 2000 and 1974, stocks rolled over into a bear market thereafter.
Statistically, a six-month December low or December loss is extremely rare (less than 5% of the time), but when it does happen, there’s at least a 50% chance of an ensuing bear market.
Talking about bear market, the Russell 2000 is already down 22.84%, the Nasdaq Composite 19%, and the Dow Jones Industrial Average ‘only’ 14.06%.
The bear-market seesaw
What exactly is a bear market? Different folks have different guidelines. Here are the three most popular ones. A bear market is a:
• Drop below 200-day simple moving average
• Decline of more than 20%
• Decline of more than 30% after 50 days, or 13% after 145 calendar days (Ned Davis Research)
Depending on the guideline and index, we are already in a bear market or close to one.
But, bear market is only a status like “online” or “offline”. Just because someone is offline today doesn’t mean they won’t be online tomorrow. The status has no predictive meaning.
In fact, statistically, the average bear market (based on the last 10 bear markets defined by Ned Davis Research) end after a decline of only 16% (chart of the average bear-market trajectory...