The Shortest Bear Market in History?
May 21, 2020
May 21, 2020
Back at the end of the 4th quarter correction in 2018 the buy-side only crowd wanted to claim that 19% downturn as a bear market, the shortest ever. Well there are a number of reasons why that was not the case and CT argued the reasons back at that time. It has lots more to do with the form it took not the arbitrary definition given a bear of 20% or greater.
Today after the debacle that took place over 40 days or 6 weeks and cashed in 38% in profits, the buy-side only mob is calling for a “V” shaped bottom and a continuation of the “Greatest Bull Market” ever. Well like most humans we want things to get better, but it depends on what side of the desk you are sitting on that determines what that batter is.
As you will see history does repeat and if Einstein is correct “The distinction between the past, present and future is only a stubbornly persistent illusion.” Without getting into the average time and the average price decline or the standard deviations above and below these averages, it is all about the “V” shaped low and the “W” based low. Its all about 2020 not being another 1987.
What the investing community witnessed in that 40 days was an unparalleled price based event. There was no Black Swan like a number of “want to be” analysts or content providers called it. So to be clear a Black Swan event is an “unknown – unknown.” Whereas the excuse for the market’s vulnerability was known in December 2019 to the public, if they were listening. Just ask Peter Navarro and his publically available statements. Of course the majority in their sheepish fashion were not attuned. Hence it was a known unknown that acted as the catalyst on a market that CT called “fragile” So jittery that a feather could have pushed it over. CT called for a risk of 50% and a spill on February 12 and 19 and loaded up the long VX system on February 24 and hedge off March 16.
That’s all good and fine but it’s this thing that a V” shaped low is in place and a test is not needed this time, and it will be different that bothers me, based on history.
In 1929 and 1987 no one saw the financial crisis coming. Studies like Shiller’s found there was no EXTERNAL cause for the blood bath. There are other massive declines that at the time were unparalleled. When you consider similar out of the blue crashes in 1946, 1997, and 2001 with the 1929 and 1987 events you see what their form is and what makes them unique.
The daily bar of 1929 reveals a “V” low without a test that leads to a five-month recovery before a highly changeable bear market began for the next three years and a massive trading range into the secular bull market kickoff in 1949 – for us baby boomers. The long bar day on the 29th was a mear 21%.
In 1946 that was plenty of post-WW-II to be happy about, the St. Louis Cardinals d. Boston Red Sox (4-3) and Benjamin Spock’s published his childcare classic. What could go wrong? A head-and-shoulders top said, 24% decline over two to five months depending on how you measure it.
What is clear about the low is the testing of the low before a three-month recovery. While the market recovery did not last the successful test was the groundwork for three years of base building – a 20% trading range – into the 1949 low leading to a secular bull market. The key was the base and the test.
Thet pointed their fingers in ’87 at “Program Trading” as the cause of the crash, a factor that has been debunked over the years. While on its longest decline day of 29% is greater than 1929 what is key here compared is the two successful sell-offs that could not make new lows. Such a “W” test set the stage for the base building that leads to the next leg of this secular bull market into the early peak of 2000. But hang in there because there is on more crash out of the bull before we get to 2001.
Everything is beautiful in 1997, US shuttle joins Russian space station and Hong Kong returns to China. The market had a 19% correction by definition but it ended with a panic day long bar 9% on the day. The stuff a normal correction is not made of. However, what is important is the “W” test of the low. Two times the market retraces 62% before taking back off on its historic bull run.
This brings the market to its peak in early 2000. One of the key points of the chart is how the “V” lows were only medium-term trading lows in the majority. After the attack on 9/11 and the market reopened the market experienced an 8% panic decline on the day and followed by more sell off the next.
That “V” shape low like 1929 was followed by 5 1/2 months of recovery, but no continuation of the secular bull market. In a similar fashion in 2001, the damage was done and it would take nine years of the base building into the low of March 9, 2009 before a new secular bull could begin. But it was the successful test in 2003 that was the start of the base building.
From the book of the rare and unparalleled market declines that caused one-day declines which marked a sudden and massive shift in investor psychology came the crash that will always be known based on the Corona Virus. Large one-day declines that add up quickly to a superior annualized returns. March 2, down 5%, March 9 down 8%, March 11 down 6%, March 12 down 10% and March 16 down 13%.
To be certain this low from a rare unexpected sell-off and panic looks more like 1929 than the others cited above, because there is no test of the low, which leads to the base building required to begin a new leg up in an ongoing 140-year-old bull market. Rather the financial media is leading the market higher with “hope” and exaggerations in its headlines for a market that does not have a base to build from like 46′, 87′, 97′ and 2001.
To be clear to the buy-side the only crowd, CT encourages your focus on nominal prices, new highs and new lows, and the bragging rights you like to enjoy with them.
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Jack F. Cahn, CMT
Contrary Thinker since 1989,
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