This Is When The Bear Growls

Includes: SPY
by: Eric Parnell, CFA


Some investors are bracing for the potential of a meaningful correction.

But when exactly might such a correction finally take place?

History provides some notable clues.

Some investors are understandably nervous. Following a more than five-year bull market in stocks (NYSEARCA:SPY) that is already built on the shaky foundations of a sluggish economy and corporate revenue growth, some investors are bracing for the potential of a meaningful correction. They feel like it could come at any time, particularly with the Fed continuing to scale back on QE related asset purchases, coupled with the fact that valuations are also a bit rich and the stock market has not experienced even a mild correction in excess of -10% for a historically long three years and counting. But when exactly might such a swift correction, even if it were of the mild and fleeting variety, finally take place. History provides some notable clues.

Beware The Start Of A New Quarter

One has to look no further than recent history to begin seeing a pattern around when the growling stock market bear likes to emerge from its cave. More often than not, it happens not long after the start of a new quarter. Keeping the months of January, April, July and October in the mental register, the following is a list of some of the more notable post crisis corrections in recent years based on their effective starting dates:

  • October 17, 2012 - stocks drop by -7.4% through November
  • April 3, 2012 - stocks drop by -9.6% through early June
  • July 22, 2011 - stocks drop by -18.3% through early October
  • April 23, 2010 - stocks drop by -16.0% through early July

Then there are the episodes that exploded during the financial crisis bear market from 2007 to 2009.

January 6, 2009 - stocks drop by -27.7% through March after having stabilized since mid-November 2008

October 1, 2008 - despite holding relatively steady through the rest of September after the Lehman failure, stocks immediately drop by -35.2% through mid-November, including a -22.9% drop in the first nine trading days of the quarter.

Of course, there were also the 2007 market double peaks that took place in July and October of that year and were followed by losses of -12% and -19% as the bear market started to get underway.

Going back a little further to the bear market from 2000 to 2002, we see the same months repeatedly popping up in the discussion.

Stocks peak on March 24, 2000, but grind sideways before plunging by -12.3% in April. Stocks double top in September 2000 before sliding lower, but do not break down in earnest until October when the market drops by nearly -10% over the course of a few weeks and ends up down -12.7% by the middle of December.

Following a brief rebound, stocks top out once again in January 2001 and go on to decline by -22% through early April. And outside of the shock associated with the events of 9/11, stocks continue to grind lower with fits and starts until July 5, 2002 when they suddenly plunge by -22% in less than three weeks. After a short bounce, stocks continue on to set their final bear market low on October 9, 2002. And even after setting a bottom, stocks had to endure another -15.7% decline from January 14, 2003 to its final low in early March.

Looking even further back into history finds the usual suspects on list.

October 5, 1987 - Stocks complete a mid-September bounce to top out before falling by -34% over the next sixteen trading days.

January 11, 1973 - Stocks peak and enter a major bear market that includes a -48% decline in value. Decisive breaks lower occur along the way in October 1973 and July 1974

And of course, the granddaddy of them all took place on October 28 and 29, 1929 when the stock market crash got fully underway. And after initially finding its footing with a solid bounce through early next year, the stock market disintegration entered its next decisive leg lower starting on April 10, 1930.

None of this means that the bear only growls once a new quarter is underway, as the heart of sharp corrections have taken place during other parts of the year. But many times there are distinct catalysts that accompany the peaks that occur during other months of the year, whereas the sharp corrections that take place during these four months often occur for no other reason than the greatest fool finally placed their buy order and the market has reached exhaustion.

So while the market has seemingly entered another dreamy state of complacency these last few weeks in June, investors should not allow their guards to come completely down. For while July may prove just as pleasant this year as May and June, history has shown that if the bear were to finally emerge from hibernation, that July is one of its favorite months to come out growling.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long stocks via the SPLV and XLU as well as selected individual names. I also hold a meaningful allocation to cash at the present time.