Market's Recovery Similar to Past Cycles

Interestingly, the market's recovery since the March 9th low is following a similar path as 10 prior bear market recoveries. These recoveries occurred after so called waterfall declines.

(click to enlarge)

Chart Courtesy of: Schwab & Ned Davis Research

Liz Ann Sonders, Chief Investment Strategist at Charles Schwab (SCHW) notes:

In waterfall declines, the Dow loses more than 20% in a short period, and near the end, the 10-day average of NYSE total volume rises to two times its average seen just a few months earlier. In the majority of cases, the end of the waterfall decline wasn't the end of the bear market.

However, in the composite average, the lows were tested but not broken, followed by a basing phase of up to three months before a breakout to a new bull market. The chart below shows the performance of the Dow as averaged from the 10 waterfall declines between 1929 and 2002.

The market's strong advance is now running into technical resistance. The market's close on Friday at 919 is near the 200-day moving average of 928. Additionally, volume has been declining and the MACD is negative with the 12-day moving average below the 26-day moving average.

(click to enlarge)

The market seems to be in a phase where "less bad" economic and corporate news is viewed positively. In order for the advance to be more than a cyclical bull market and turn into a secular one, some of this "less bad" data will likely need to become "good" data.

Comments

[LatStephen:]

www.dshort.com/charts/...

Jun 01 05:53 AM

[LatStephen:]

www.dshort.com/charts/...

Jun 01 05:55 AM

[Tom Armistead:]

The drop from early January to 3/9 seels about right size to fit the average according to the graph, but the recovery since has been quite a bit more rapid than the usual pattern.

You could argue that the decline from September 2008 to 11/20/08 was also a waterfall decline, and a severe one.

So the two of them together would constitute the W shaped recovery...

Jun 01 06:36 AM

[Tomcat101:]

Most of the experts on tv aren't even talking about a pullback anymore. We are all enjoying the euphoria of the never-ending rally. It's times like this when you get hit with a sudden pullback when you least expect it.

Jun 01 07:39 AM

[TradingHelp...:]

Your comment "The market seems to be in a phase where "less bad" economic and corporate news is viewed positively. In order for the advance to be more than a cyclical bull market and turn into a secular one, some of this "less bad" data will likely need to become "good" data." is spot on. I have thought this for some months. I think the "good" data you refer too will come through in Q3 and will surprise many bears and pessimists on the upside. We are seeing an unprecedented wall of money coming into the global economy via internationally co-ordinated monetary easing and government cash injections onto the balance sheets of strategically important institutions. Inflation is coming. seekingalpha.com/insta...

Jun 01 07:52 AM

[jeandit75:]

wishful thinking Tom...you just hope there is not a double bottom in the market. Hope can have you make a lot of $$$.


On Jun 01 06:36 AM Tom Armistead wrote:

> The drop from early January to 3/9 seels about right size to fit
> the average according to the graph, but the recovery since has been
> quite a bit more rapid than the usual pattern.
>
> You could argue that the decline from September 2008 to 11/20/08
> was also a waterfall decline, and a severe one.
>
> So the two of them together would constitute the W shaped recovery...

Jun 01 08:21 AM

[carey_jim:]

As I've said before, I challenge anyone with a scientific mind to assemble a random selection of 100 charts of economic data and test analysts' ability to predict the right side of the graph from the left.

It can't be done.

Jun 01 11:25 AM

[RiskReturnO...:]

This is somewhat consistent with the 1937 playbook, the 1975 playbook that many professionals are using as guideposts. Personally, they all point to the same conclusion -- perhaps the bottom in the market has already been set, but the going forward return (annually) will be in the 5-8% range with higher than (long term historical) average volatility. In this environment, it's a bit safer to own stocks for the long run (for capital preservation), but capital appreciation will come from dividends, and for those following my strategy, the call premiums from selling upside calls.

Best guess for returns for the next 5-7 years will be: 5% SPY price gain; 3% dividend; 12% call premium from selling monthly calls (strike price +5% over closing level). Total return can be +20%, beating 4-8% treasury yield (assuming past history of inflation).

The 1937 playbook will take this to 1942 (final bottom); the 1975 playbook will take this to 1982 (beginning of new bull market).

Jun 01 12:13 PM

[carey_jim:]

Complete nonsense.

Reading (Chinese) tea leaves will produce better results.

On Jun 01 12:13 PM RiskReturnOptimizer wrote:

> This is somewhat consistent with the 1937 playbook, the 1975 playbook
> that many professionals are using as guideposts. Personally, they
> all point to the same conclusion -- perhaps the bottom in the market
> has already been set, but the going forward return (annually) will
> be in the 5-8% range with higher than (long term historical) average
> volatility. In this environment, it's a bit safer to own stocks
> for the long run (for capital preservation), but capital appreciation
> will come from dividends, and for those following my strategy, the
> call premiums from selling upside calls.
>
> Best guess for returns for the next 5-7 years will be: 5% SPY price
> gain; 3% dividend; 12% call premium from selling monthly calls (strike
> price +5% over closing level). Total return can be +20%, beating
> 4-8% treasury yield (assuming past history of inflation).
>
> The 1937 playbook will take this to 1942 (final bottom); the 1975
> playbook will take this to 1982 (beginning of new bull market).

Jun 01 12:20 PM

[Larry House:]

I know everyone wants to get a handle on what we are going through right now, but I cringe when I hear any connection between THIS time and PAST times. There is no comparison. That is like saying, "Well, the boxer went down just the way he always did before when he was knocked out. How did I know this time he had a broken neck." I know there is every opinion imaginable floating around, and I am skeptical of all, but some economists are saying we won't see the worst of the collapse until 2012. Fact is, this time is just so different no one can really quantify it.

Jun 01 03:44 PM