Friday, June 8, 2012

Dips vs Bear Markets

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).
His summary:
  • 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).
Fundamentally, the two main questions are:
  • Are we heading for a US recession?
  • Fed intervention: occurred the last 2 times the market dropped 20%. When is QE3?  (And will the market respond to another shot of morphine?)
We won't know these two things without hindsight.

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