What Happens After Two Bad Months in a Row?

With October shaping up to be as bad (and probably worse) than September, let's look at what happens after two really bad months in a row. Here I define it by two months that each had worse than -9% performance.

Since 1900 in stocks, that has happened 7 times. The resulting three months of performance follows each group. Median return around 7%, average (because of the 91% observation) of 14%.

I don't put much faith in this with only 7 observations, but it could set the stage for a nice holiday rally. Investors looking to speculate could put on half a position in November, and half in December with exits at the end of December and January.

10/1929 -19.71%
11/1929 -13.06%
----
12/1929 2.90%
1/1930 6.65%
2/1930 2.50%
(+12.48%)

4/1931 -9.20%
5/1931 -13.27%
----
6/1931 14.46%
7/1931 -7.06%
8/1931 1.47%
(+7.95%)


11/1931 -9.30%
12/1931 -13.90%
----
1/1932 -2.31%
2/1932 5.95%
3/1932 -11.32%
(-8.22%)


3/1932 -11.32%
4/1932 -19.75%
5/1932 -22.75%
----
6/1932 -0.05%
7/1932 38.51%
8/1932 38.28%
(+6.94%, 91.42%)


9/1937 -13.81%
10/1937 -9.67%
11/1937 -9.64%
----
12/1937 -4.5%
1/1938 2.05%
2/1938 6.73%
(-12.00%, 4.01%)

Comments

[Stone Fox C...:]

Whats scary is that in a couple of cases, it actually got worse in the 3rd and 4th months. On the flip side, all 7 occasions happened during the Great Depression. A time when the govt made things worse buying raising rates and such. This timie the govt is throwing trillions of dollars into the system. Hard to expect the same outcome. Based on not having 2 consecutive quaters of -9% since, I'd say Nov is shaping up to be one positive month.

2008 Oct 22 12:08 PM

[Urbane Gori...:]

I agree with Stone Fox Capital... The situation and Government responses are different. Not a comparable situation and teh sample is too small to draw conclusion from anyway.

jegan

2008 Oct 22 01:10 PM

[Indexor:]

So Mebane, will you take positions for your clients based upon this info, even if the price is below the 200-day trend, or is that a hard and fast rule that you won't re-enter an asset class until the price rises above it?

2008 Oct 22 03:43 PM