From "Is the Bear Around the Corner?" by Jon D. Markam.
How often does a 10% midyear "correction" go lower to become a 20%+ bear market, and what happens if it does?
- From 1928 there were 24 10% drops - a bear market occurred only 1/3rd of the time (7 times), but for those, the S&P lost an average of an additional 38%
- For those bear markets, after the initial 10% loss, the maximum rebound averaged +8.3% (before going south again).
If the S&P 500 loses more than -5% from the Monday close, then the
probability increases that we could be in the throes of a prolonged, new
bear market. The line in the sand, then, is 1,214.
In contrast, if the market rallies more than +10% from here, to 1,405, then the chances of a bear market dramatically decrease.
Other things when looking at counter trend rallies for clues to market direction, from Barry Ritholtz:
- A reaction rally lasts 2-7 days. "Watch the market breadth, the volume and where we close relative to the highs and lows for some small measure of insight."
- Counter trend rallies are powerful and euphoric. Some of the best one day gains occur in bear markets. Fear (short sellers being squeezed) is stronger than greed (legitimate buying).