With the losses on Wednesday and Thursday, the major U.S. indices officially reached bear market territory by falling over 20% from their peaks in February. Looking at the rapid decline, I couldn’t help but be astounded by how sharply the decline has occurred. In four weeks the S&P is down over 26% – at least at the time I was writing this.
With the coronavirus spreading rapidly in the United States and globally, all kinds of business is being suspended including travel from Europe, the NBA season, political rallies, college sports and in-person classes, etc.
Looking at what this bear market looks like and trying to compare it to what we saw in the last two bear markets could be meaningless, but I looked at the charts from 2000-2003 and from 2007-2009. It really is astonishing how rapidly this bear market was confirmed. In 2000, the market peaked in March and it wasn’t until February 2001 that the S&P reached the 20% threshold for confirming a bear market.
Of course, the pain would persist and we would see three more 20% declines before the market finally hit bottom. There was a brief rally in early 2001 that saw an intermediate peak and the S&P fell 20% from January through March. From there we saw another brief rally, but from May 2001 through September, we saw the S&P drop 28%.
The index would rally again from September 2001 through March 2002, but then it fell another 34% from March through July. The S&P finally bottomed out in October 2002. The loss from the peak to the trough was just over 50%, but you can see how that bear market was much more drawn out that what we have seen in the market this time around.
Looking at the bear market from 2007 through 2009, we see that things developed more rapidly, but nowhere near as rapidly as the current market. The S&P peaked in October 2007 and by March 2008 we had seen a 20% decline. There was a small bounce and the index seemed to find resistance at the 52-week moving average in May 2008.
From the peak in May 2008, the S&P would fall 20% again by September. From September 2008 to the eventual bottom in 2009, the S&P would fall another 47%. That time the peak to trough decline was 57.7%.
Over the last few weeks, I have heard a number of commentators and market analysts mention a V-shaped bottom. Some said they expected such a recovery while others stated that they see more of a U-shaped bottom. Regardless of which one you think will happen, I would suggest being cautious about either one.
Yes, this bear market is very different from the ones we have seen so far this century. It was triggered by a pandemic, not an economic event like the financial crisis or falling earnings. There isn’t really anything in modern history to compare this market to, but I can’t help but notice how each of the last two went through different phases on their way down.
The other thing I noticed was how the 52-week moving average and the 104-week moving average acted as resistance on three occasions in the 2000-2002 bear market and in the 2007-2009 bear market the 52-week acted as resistance once.
The market will rebound at some point, but personally I am not jumping in yet. We haven’t even been able to put together two days of gains in a row for over a month now. Even when we do start to rebound I know I will be exercising caution when the S&P starts to approach its 52-week and 104-week moving averages and I suggest that you do as well. There were a number of investors that probably got burned in March 2002 and in May 2008.
I have expressed on many occasions in Bull Market Rodeo articles that you don’t have to jump out of stocks completely when you are concerned about a decline. That same theory works in reverse—you don’t have to jump back in all at once on the way back up. Set targets of when to increase your stock holdings as the market recovers. If the S&P sees a bullish crossover in the weekly stochastic readings, maybe increase your stock holdings by 5%-10%. If the index crosses back above its 52-week, maybe you increase it another 10%.
This bear market may be different, but I will treat it just like the other bear markets that have occurred since I entered the business.