(Bloomberg) – This may only be important to one statistician: the last day’s bounce of the S&P 500 prevented it from closing below 20% of its last record, avoiding the most unpleasant definition of a bear market. For now.
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Trying to keep pace with Wall Street analysts, this is another turning point in a wonderful year. But for market historians, it can’t help but ring a vague, bullish bell.
For the record: The S&P 500 dropped to 3,810 during Friday’s session, or about 20.6% below its January 3 record close, then reduced the loss to 18.7%. Levels can be dismissed as trivial except for a disturbing fact: there are probably a large number of long-lasting examples of such retaliation in history. In 1998, 2011 and 2018, the benchmark is either below the 20% level or very close to it on an intraday basis – just to reverse itself and never test the beer-market water again.
“All bottoms are made up of short-term or long-term, short-term traders, and when the S&P is down about 20%, they sink their toes again,” said Matt Malley, chief market strategist at Miller Tabak +.
The S&P 500 closed all the way back to a low of less than one point from a 2.3% drop on Friday. It extended the longest infallibility since 2001, however, could not avoid a seventh weekly drop.
Another fact to remember from that near-death experience of the past: how energetic they were. Consider, for example, a 19.4% decrease from April 29 to October 3, 2011. Below that, the gauge has experienced a three-day gain of more than 1.5% – and continues its best month in 20 years. The recovery paved the way for the longest bull market ever recorded, culminating in the Covid crash.
Something similar happened in 1998, when the benchmark fell more than 19%, down to 8 October, before a 2.6% rally saved it from oblivion. From the beginning of October to the end of January of the following year, the gauge increased by about 25%.
In 2018, the bull market was in the 20% fall point on December 24 before launching a dime just after Christmas. Six days later a year begins where the S&P 500 is up 29% and the Nasdaq 100 is up 38%.
From 2018: The cry of extinction in the bull market that has surpassed them all
Being above the 20% level is psychologically important, says Malley. “When it holds and gains some traction, long-term investors come and start feeding the rally itself,” he added.
Julian Emanuel, chief equity and quantitative strategist at Evercore ISI, says 2018, 2011 and 1998 were on his mind. “These three episodes occurred significantly during the Fed’s austerity period and were not accompanied by the US recession,” he wrote in a note. His firm is not predicting a recession this time, either.
To be sure, Friday’s price action means betting that a bear market will be avoided is a misunderstanding of the rules of probability. The pattern that captures the reversal of the past is very small – only three. Moreover, it is only by the most nitpicky definition that stocks are not already on the bear market. Sentiment has been throttle, earnings are in doubt, and many other large equity benchmarks – including the Nasdaq 100 and Russell 2000 – have fallen to the required percentage.
One could also argue that with the equity route continuing for more than four months, the hurt in the minds of investors has already taken place. So far, this pruning is longer than the other three bear markets.
Although the definition of a bear market is debatable, it does have a strangely predictable link to the real world. The S&P 500 has completed the required 20% immersion fourteen times in the last 95 years. In just three episodes, the American economy has not shrunk in a year. Of the 14 recessions over the span, only three were not with a bear market.
“The market is generally far ahead of economic data, so the market is already feeling it – no question about it,” said Scott Bauer, CEO of Prosper Trading Academy. “Something has to pop here.”
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