Expect a bounce in stocks, but this bear market isn’t over yet

Thursday, 20 December 2018 18:35

Expect a bounce in stocks, but this bear market isn’t over yet

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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%.

This month, the S&P SPX, -1.53%^[1] has lost 9.2% through Wednesday’s close. The worst December occurred in 1931, when the S&P tumbled 14.5%. And in 1980, the S&P dropped 9.4% through Dec. 11. Performance numbers are calculated from the November close to the lowest daily December close. But December 2018 is unique, because the S&P jumped 30 points into the Dec. 1 open and has lost 10.2% since then. In a way, this is the worst December since 1931. A rare event Regardless, statistically, a 10% (or near-10%) December loss happens only 2.2% of the time. Let’s take a look at one more measure of December weakness. Since 1970, the S&P 500 fell to a six-month low in December only three other times: in 1973, 1987, and 2000 (red arrows, chart above). In 2018, the S&P 500 has lost more than 10% and dropped not only to a new six-month low, but also a 12-month low. Does a terrible December spell doom for 2019? Let’s take a look at how the S&P 500 did the year after 1973, 1987, 2000 and 1980. The red arrows mark the December lows.

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...

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