How often do we get a Bear Market after a strong bull market plunges to the 200-day moving average?
By Wisdom Seeker, WolfStreet Commenter with a physical sciences Ph.D., living in the San Francisco Bay Area, employed and anxious about his retirement portfolio.
Wild Bull: As measured by the S&P500, a stock market that has risen more than 30% in 18 months.
Hibernating Bear: The Wild Bull’s manic-depressive “dark side”, which often awakens when the market falls below its 200-day moving average.
Since mid-2020 the S&P500 index of large US stocks has been a Wild Bull, raging up over 40% in just 18 months. But as Wolf reported yesterday, over the past 3 weeks the Wild Bull stumbled badly. The figure below shows the 18 months up to yesterday, when the S&P fell to its trailing 200-day “moving average”, a common measure of market health. Such stumbles are both rare and frightening, since trillions of dollars in digital wealth evaporate in only a few weeks.
Worse, a drop below that 200-day moving average often reflects stark changes in market behavior – Hibernating Bear awakening – with potential for a long & deep bear market as in 2000-2003 or 2007-2009.
So when the Wild Bull stumbled into the Hibernating Bear’s cave yesterday, I wondered: Historically, how often does a Wild Bull awaken a Bear market?
S&P500 data since 1980 shows several Wild Bull episodes where the market was up over 30% in 18 months (more or less). Like yesterday, many of those episodes end with the Wild Bull stumbling and hitting (more or less) that 200-day moving average. What happened next?
The graphs below show examples of the 4 basic outcomes:
Scenario #1) The Bull Carries On.
In the mid-1980s, 2010, and early 2018, the market managed to carry on upwards after a bit of a pause, but often the wildness was gone. The figure below shows the 1985-1986 episode.
But the Raging Bull of ’86 didn’t awaken a Hibernating Bear. The figure below shows how the bull bounced up along the 200-day average and then took off again. (This led to 1987 – more on that event in a moment.)
There were similar Bull Survival Stories in 1996, 2014 and 2018. But often the bear grabs the bull for a while and a fight ensues.
Scenario #2) The Bull Wins a Long and Turbulent Debate.
The early 1980s was a good example. The figure below shows the 1983 bull rally off the 1982 low:
That led to an extended bull-bear market battle on either side of the 200-day average through most of 1983-1984, as shown below.
The bull won, leading to the Wild Bull of ‘86 as shown above in Scenario #1. And the Bull won similar tug-of-war battles in 1998, 1999, 2004, and 2010.
But 1982-1986, 1999, 2004 and 2010 were auspicious times for stocks: the surge following the 1982 recession, the surge of the dot-com boom, the surge after the dot-com bust, and the surge following the Great Recession. At other times, the Bear awoke…
Scenario #3) The Bear Wins A Long and Turbulent Debate
In the peaking of the dot-com bubble from 1999-2000, the Wild Bull of ’98 slowed down in 1999 then bounced along the 200-day average for a while into 2000, but then finally awakened the Bear.
That led to the steep crash in 2001 (below) – that didn’t bottom until 2003.
(There was a similar bull-bear battle at the peaking of Housing Bubble in 2007-2008, but the market advance in 2006-2007 was more gradual and didn’t qualify as a Wild Bull for this study.)
Scenario #4) The Bear Slaughters the Bull (Crashes in Fall 1987 and Spring 2020)
The COVID crash in March 2020 is fresh in our minds. But there was another Slaughter of the Bull that not everyone remembers so well: 1987. And the chart from 1987 looks almost like the one for 2021-2022 (first in this article)!
But back in 1987, it was a huge surprise when the Hibernating Bear woke up fast and slaughtered the Wild Bull in just 2 days!
Bottom Line: The Wild Bull has again stumbled on a Hibernating Bear. The Bear could wake up, and it could wake up fast. Today’s markets have circuit breakers and other protections to arrest a crash, but as we saw in 2020 the market can still plunge over 30% in just a few weeks. Or the market could rally onward – employment is strong, credit is still abundant, COVID is on the wane – who really knows? But when the market stumbles down to the 200-day average, there’s more risk out there: Beware of Bear!
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Sun, 01/23/2022 – 18:40
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Author: Tyler Durden