Friday, November 21, 2008

the bear bottoming process

Let's take a step back from the current market volatility and consider what a recovery might look like. Here's a set of charts showing the eight completed bear markets since 1950 and how the S&P 500 index performed during the 12 months following the bottom. For the sake of completeness, we've included the near-bear decline that accompanied the Gulf War of 1990 — just shy of the 20% decline of an "official" bear.

As the charts show, bear markets typically spent six weeks to eight months working though the bottoming process. Rather than a sharp V-shaped decline and recovery, these bears bounced around the lower range before transforming into the next bull market.

In recent weeks the current bear market has fallen sharply to its present level. As our review of recoveries suggest, patience will be required while today's bear thrashes around his bottom.

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[However the above assumes that the current bear market is similar to the other bear markets since 1950. If indeed this is the worst financial crisis since the Great Depression, we might expect a decline to be somewhere between the other bears (loss of approximately 50%) and the Great Depression (loss of 90%). A loss of 90% would bring the Dow down to 1400 - me]

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The news is increasingly filled with references to the Crash of 1929 and the Great Depression. For the past few months we've been comparing today's bear market with the two other 40% plus declines in the S&P since 1950.

Let's now add in the Dow stats for the epic bear market from October 1929 to July 1932. Click on the image to the right for a pictorial comparison of these four bad bears.

As you can see, all four markets declined to the vicinity of minus 48%. But the Crash of 1929 included a major bear rally before settling into a leisurely decline to bottom out nearly 90% off its high set 30 months earlier.

[via Wyman]

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