Dow Jones 300+ Point Moves and Bear Markets

Merrill Lynch's David Rosenberg was on CNBC this morning arguing that yesterday's 300+ point move was simply a bear market rally, and that 300+ point moves usually occur during bear markets.  He then went on to say that during the entire bull market from 2002-2007, there was not one single 300 point rally. 

While 300 point rallies usually occur during bear markets, they have also occurred at the start of major rallies.  In fact, the Dow rallied 5.56%, 13.1% and 12.5% following the first three ever 300+ point moves in the Dow in '97 and '98.  They also occurred multiple times at both the July '02 and October '02 lows.  In fact, Rosenberg's argument that there were no 300+ point rallies during the last bull market was simply incorrect.  The Dow actually had two 300+ point days on 10/11/02 and 10/15/02, both of which came during the first week of the bull market.

Overall, the average return in the three months following all 300+ point moves has been 0.06%, with positive returns 50% of the time.  Not exactly bullish, but not bearish either.  Instead of arguing that 300+ point moves only come during bear markets, it should have been that they usually come during bear markets, but they can also come right at the turning point from a bear to a new bull.

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Comments

[TheLFB News]

Great subject guys, and one that really sums up the Hot Air Headline syndrome. Maybe the '300 point rally = bear confirmation' was a cover for Distribution means, after all you have got to have somebody to sell the unwanted goods to, right?

We are seeing signals that it may actually be a reversal, but instead of a headline we will look at the data:

Equity Positive. Despite the strong gains posted this year, commodities have started slowly to move lower, erasing a lot of the increases made in the last months. Oil dropped more than 20% from the high made in July, Minnesota wheat has dropped 60% since the top was reached in March, while corn is off by almost 30%. The medium and long-term effect of this sustained selling will be seen in the inflation read later this year, when out of nowhere inflationist pressures will drop. Furthermore, companies and ultimately consumers will see and feel these lower prices in their pockets and read the effects in earnings report. It is not clear what exactly dragged commodities lower: a supply and demand problem, the strength of the dollar lately or speculators closing long orders that have earned their keep over the last eighteen months. It is pretty clear that the equity markets have enjoyed this power selling, and seems to have helped the market to find a near-term bottom of sorts.

In reaction to lower commodity prices, the Usd made dramatic moves in trade on Wednesday, added to another dollar and equity positive was the upcoming U.S. government sale of $17 billion dollars of 10 year note debt. The 10 year note moved from paying 3.95% yesterday to 4.05% today, and in turn sent the swissy (Usd/Chf) on a parabolic move to touch 1.0600 in U.S. trade. These moves were initially negated by the news that the government backed entity, Freddie Mac, was reporting losses of $821 million this quarter, but soon found momentum once Wall Street got to work.

Yields on 30 year bonds touched their highest rate in two weeks today as the market prepared for the sale of $10 billion of new 30 year notes on Thursday, the largest amount of 30 year debt offered in over two years. 30-year notes are only issued by the Federal Reserve in times of significant budget deficits, and therefore the 30 year is a secondary market; demand for such securities is small due to its limited issuing.

300+ points on dollar and equity negatives may signal a bear market, but on dollar and equity positive fundamentals it may not follow through. The charts tell the story.

[archman82011]

Way to funny. The arguments presented cancelled themselves out based on the charts provided. 1998 was not a bear market to begin with. It was a correction during the last phase of the great 20 year bear market.
In 2002 we did have those 300 point plus days, however you were still able to buy the market close to the lows in early 2003, which really marked the start of the last mini bull market.
What is quite comical is that we had a bear market as technically defined as a bear market for about 2 days this spring when the S & P finally was down 20% from the high.
Comical.
The second we got there we were already hearing talk of "bottom" et al, and the media were using words such as "horrific" to describe the market. HA. Horrific my a*s. Talk to me if the market was down 40%. Now thats horrific.

There has been no improvement whatsoever (other that what the media defines as "good news") in any area of the economy. Housing is still a disaster, the credit crisis is far from over, and consumers are still flat broke and in debt up to their eyeballs.

See, if you are an "investor", like me, and don't rely on "Fast or Mad money" to create wealth, you are up 6% for the year as I am and have the luxury of sitting back and watching all the arm flapping bulls as they "hope and pray" the market recovers.

Things take time to work themselves out, and the ongoing credit crisis, and economic slump is far from over.

[archman82011]

RE: my above post:

I mean to say the correction in 1998 was part of the 20 year "bull" market.

[dg arc]

i.e no correlation between a 300 point move and bull or bear market