On Friday, 9.16.11, the SPY 200 Day Moving Average (MA200) was lower than it was 35 days ago. Clearly, the MA200 has rolled over. What does it mean to have this key marker of up and down trends headed south?
I guess there is still room for debate about whether or not we are in a bear market. What exactly constitutes a bear market? Do we go out of the box and use a measure such as volatility to define it? Or do we use more typical measures such as moving averages, or percentage drops from highs?
April 29th marked the recent top of the market for the S&P 500. Sell in May and go away…From the top in April to today, 9.20.11, $SPX is down -11.8%. From the top in April to the low in August, $SPX dropped -17.9%. Neither measure reaches the standard -20% drop from highs that is commonly used to denote a bear market.
While volatility has exceeded the levels reached during the lows of 2010, it has not achieved the high levels witnessed during the Armageddon trading at the end of 2008. Volatility then is not quite a robust indication that we are in a bear market.
However, if we use the MA200, which is perhaps the most commonly used bull and bear trends demarcation, we find that the MA200 is rolling over, and it has rolled over farther than any time since the beginning of 2008.
Let’s then run this test: What happens when the MA200 of SPY and $SPX is lower than it was 35 days ago?
Buy Rules:
Buy SPY and/or $SPX at the close if:
- The MA200 is lower than it was 35 days ago
- Sell the close X days later
- No commissions or slippage included
- $SPX first trade was on 5.25.1962
- SPY first trade was on 5.16.1994
The Results:
Above we have a graphic illustration of a tale of two bear markets.
- $SPX shows that over the last 50 years, this setup has generally preceded a mild bull market.
- SPY shows that over the last 15 years, this setup has generally preceded a moderate bear market.
Do we assume that now is more like recent history, or the average of the last 5 decades?
Obviously, the bear markets of 2000 and 2008 have weighed very heavily on the SPY results. We have to ask ourselves if the next 100 days will be more like the average of the last 5 decades or more like the average of the last 2 bear markets.
My best guess is that the immediate future will look more like the recent past. As I have been bearish for some time, this prediction should be no surprise, and it may just be my bias speaking more so than the result of any scientific observation.
As we attempt to determine whether or not we are in a bear market, according to this one measure, and measuring over the more recent past, we likely are in a bear market.
I think it seems fair, because much of the past 50 years of data contains the equities doldrums of the 60s/70s, which probably had a lot of this setup with the market going nowhere for over a decade.
Thx Wood. ROC indicator turn yet?
The ROC indicator is very, very close. It is closer than it has been since I wrote about it.
I should have noted, on $SPX, there were 1,812 occurrences of this setup. There were 43 trades if each trade were held for the full 100 days.
SPY had 588 occurrences of the setup. There were 14 trades if each trade were held for the full 100 days.
Nice work, Woody.
Nice work as always.
But if you take the big gap down on day 98 out it shows a minus of 1.5% .. I’d assume if you add another 30 days we will go back to the – 1% to -2% area.
That is not really significant and doesn’t constitute a bear market. Actually with all the trouble going on in Europe and US I would be very happy if someone could assure me we will be down only 2% in 3 months 🙂 that would give great opportunities for stock picking on the long and short side
Jason, thanks.
However, it is not a gap down on day 98. It is actually the average return of 14 trades on day 98 after the setup. So either a few of the 14 lost a lot during that time, or all of them accelerated their losses near day 100. Looking at the actual trades, it appears that it is the latter, rather than the former.
If I told you with surety that you would be lower 100 days from now than you where you are now, would that be a bear market?
I agree with you about Europe. It has me worried.
Thanks Wood,
I always love this stuff.
Did you guys notice it’s not stylish to talk about the Hindenburg Omen anymore?
I haven’t heard about the HO for at least a year.
Pre-2000 when the Fed poured nitro down the carb our heads snapped back.
The Fed has no nitro. Since 2000 the only rocket fuel has been oversold conditions or short term GDP moves from recessionary abyss.
Good point.
Thanks Wood.