The market is nearing the top – what can you expect?

Earlier, I discussed the reasons why our economy would go through a major recession.[1] My study of the major bear markets[2] indicates that after a peak and a fall in the market, such as the one we have experienced since January 26, there is a second cap that is between -2.6% and + 2.9% of the first. This marks the beginning of a major bear market. Having hit the traditional hedge range, what can we reasonably expect in the future?

What follows is a summary of market behavior for each of the major bear markets since 1929 which, like ours, was preceded by a correction. There are six of them from 1929, 1937, 1946, 1969, 2000, and 2007. Data from the S&P 500 is used for the bear markets of 1968, 2000, and 2007. Closing data from Dow Jones[3] it was used for all bear markets before that.

1929

The biggest drops for this market were (business days from the peak in parentheses) 13.5% (12), 11.7% (13), 9.9% (17), 6.8% (20) and 6, 3% (9). The 30-day average change was -1.07%. On trading day 10, the percentage loss was 15.1%. On day 30 it was 31.0%.

1937

The biggest drops for this market were 5.0% (18), 4.5% (15), 4.3% (28), 4.1% (24) and 3.1% (20). The 30-day average change was -0.68%. On trading day 10, the% loss was 6.0%. On day 30 it was 19.1%.

1946

The biggest drops for this market were 2.5% (15), 1.2% (13), 1.0% (30), 0.95% (14) and 0.77% (8). The 30-day average change was -0.13%. On trading day 10, the% loss was 0.9%. On day 30 it was 3.9%.

1968

The biggest drops for this market were 1.4% (19), 0.92% (3), 0.90% (17), 0.89% (4) and 0.77% (18). The 30-day average change was -0.29%. On trading day 10, the percentage loss was 2.7%. On day 30 it was 8.4%.

2000

The biggest drops for this market were 2.6% (28), 1.9% (24), 1.6% (27), 1.5% (19) and 1.4% (10). The 30-day average change was -0.33%. On trading day 10, the% loss was 5.0%. On day 30 it was 9.6%.

2007

The biggest drops for this market were 2.9% (10), 2.6% (15), 2.5% (6), 1.8% (27) and 1.6% (29). The 30-day average change was -0.24%. On trading day 10, the% loss was 2.6%. On day 30 it was 7.3%.

All bear markets gradually fell during the first week. In fact, it was rare to find a substantial drop during that first week. With the exception of 1969, none of the largest percentage drops took place during the first week and were only 0.92% and 0.89%. Markets began to diverge during the second week with the 1929, 1937, and 2000 markets falling 15.1%, 6.0%, and 5.0%, respectively, after 10 days of trading.

Once the top was reached, there was no going back. Instead, most markets experienced a steady decline. The only exception was the extremely volatile market of 1929, which declined 35% on the thirteenth day, recovered 19%, and subsequently resumed its decline. This is an important point for our market as the S&P 500 had an intraday high of 2801.90 on March 13. This put it within 2.5% of the January 26, 2018 high, just inside the window for the second range high. That would have put that second historically early potential peak for a major bear market with a correction preamble. The fact that 24 trading days after we are still moving back and forth and in a recent uptrend is in stark contrast to previous bear market profiles and argues against that being the second peak.

Note that with the exception of the 1929 market, which was recovering at the time, none of the markets had reached bearish territory 30 trading days after the market peak. Technically, the 1937 market had plunged into bearish territory days earlier, but was only 19.1% below the peak by the 30th. All other markets were only approaching correction level territory.

Given that summary, it is likely that we will also experience a gradual decline with little damage the first week. In fact, with the big loss days paling in comparison to the ones we saw in early January, it may well leave investors feeling satisfied. After having gone through a long correction, there will likely be little concern a month and a half later if the 30th trading day comes with losses still in the single digits. That would be a mistake as the bear is relentlessly approaching us.

[1] It’s Not Over, EzineArticles, April 9, 2018.

[2] The Coast Is Unclear: Signs Of An Imminent Major Stock Market Downturn, EzineArticles, Feb 20, 2018.

[3] Wharton Research Data Services (WRDS) was used to collect the Down Jones closure data and in the preparation of this article.