Sunday, March 20, 2016

Is it really 1933?

“If the Dow can hold its gains through the end of the month, it would mark the biggest quarterly comeback since 1933.” Story at…
Ok.  That’s impressive, but I wondered if it’s really necessary to go all the way back to 1933 to look for similarities in the past.  Have there been other similar bear-market rallies? Turns out one need only go back to 2007. As of Friday, the S&P 500 has made a 10% bear-market rally from its low. In 2007, the Index made a 9% bear-market rally before it reversed direction down.
The below chart plots the S&P 500 %-change from the top in July 2007 vs. the %-change from the top in May 2015 (now 2016). The two corrections are aligned so that each top starts at 0% at the left (y) axis and continues in days along the bottom (x) axis. (For example at about day-50, the Index was about 2% below its all-time high in both 2007 and 2015.) As of Friday the corrections are at day 207.
It is interesting that at around day 170 the two corrections made lows.  The 2007 correction bounced up until day 204 and resumed falling. As of Friday, the 2016 correction is now at day 207.

One of the indicators that investors watch after a bottom is how the small caps are performing.  Since the recent bottom in 2016 they are outperforming the S&P 500 and this is cited by the bulls as proof that the correction is over.  Small caps outperformed in 2007 by the same amount as now after 9% bear-market rally and we all know what happened in 2007. Is this 2007? Probably not; but it might not be 1933 either.