As of the December low, the S&P was down 20%. Here’s the chart.
Let’s check out all 20% drops going back to the Great Depression to see how the market has tended to act or behave afterwards. (charts courtesy @bullmarketsco)
2011: While being very choppy, the S&P almost retraced 50% before eventually falling to a marginal new low.
2007-2008: The S&P retraced 50% over 2 months and then got crushed.
2000-2001: There were multiple 20% drops during 2000-2003. The first, shown here, was followed by a 50% bounce before the S&P rolled over again.
1998: The S&P bounced 50% before falling to a marginal new low.
1990: The S&P bounced 50%. Then it gave back half the gains before righting itself and moving higher.
1987: The S&P retraced less than 38.2% before almost retesting the lows. Then the market slowly recovered.
1981: The S&P bounced 50% before rolling over and twice falling to lower lows.
1980: The S&P went straight up and didn’t suffer a meaningful pullback until it was more than 40% off its low – and this took place in 8 months.
1974: The S&P bounced 50% and then retested the low before bouncing back to the 50% level again. Then the market died.
1967-1970: After falling 20% in 1969 and 70, the S&P simply continued stair-stepping down.
1966: The S&P bounced less than 38.2% before falling to a marginal new low. Then it bounced for good.
1961-1962: The S&P retraced 38.2% before almost retesting the low. Then it rallied nearly 50% over the following 14 months.
1957: After falling 20% the second half of 1957, the S&P put in a little double bottom and then rallied huge.
1937: Off a high in early 1937, the S&P fell 20%, retraced 50% of the loss and then got cut in half over the following 2+ quarters.
1929: Beginning of the Great Depression. The S&P did manage to retrace 50% off the prior drop before dropping 80% over the following 2 years.
Conclusions:
No matter how horrendous the market is, a 50% retracement is very common. Heck the S&P got one at the beginning stages of the Great Depression. From there a drop to the lows is common, but there are a few instances where a minor dip was followed by a rally.
A 38.2% retracement (or thereabouts) also appears to be popular. One would think a shallower bounce was a sign of weakness, but this wasn’t often the case. In 1962 and 1966, retracements of 38.2% or less were followed by double dips and then big rallies.
The bottom line is: despite a 20% drop, bearish headlines and declining sentiment, a 50% retracement of the loss is common, so don’t be surprised when the market appears to be falling apart one month and then all is good the next.
After a 50% bounce, the results are mixed – some shallow dips followed by rallies; some double bottoms followed by rallies; some big selloffs that lasted a long time.
In the charts above, the initial 20-25% drop produced a bottom half the time. One-third of the time the market continued down in a big way. There were a couple instances were the low was taken out by a small or moderate amount.
Regardless of how bad things seem on the way down, be open minded.
Jason Leavitt
[email protected]
Read Next
