There’s a saying that market tops are a process and bottoms are an event. This is meant to imply that tops are formed over drawn out periods of time, often several months, while the market will find a final low in a quick v-shaped pattern. While markets rarely mimic the exact pattern of prior moves, there are often characteristics that take shape at many turning points. Looking at prior market corrections, bear markets, down trends, or however you’d like to title them, we can see that bottoms are actually less of event/v-shaped as the saying implies and more out of a whimper of selling that’s often already been exhausted.
Below is a daily chart of the S&P 500 going back to 2011 with three unique pieces of information about the internals of the market. First we have the number of new 52-week lows made by the individual components of the S&P 500, next is the percentage of those components that are trading above their respective 50-day moving average, and finally the momentum of the S&P 500 itself.
While this is not an exhaustive study of market history, I’m looking at just the past three down moves to keep the chart easily visible and to make the point that we don’t always see exact replication of bottoms.
In 2011 we saw more of a ‘bang’ in new 52-week lows as the list expanded at the final September low, however more stocks had begun trading above their intermediate moving average and the momentum of the index was substantially off its low.
Again in 2015 we saw an improvement in the percentage of stocks above the 50-MA as well as fewer stocks making new lows when the index made its final low. Momentum had also improved, creating a bullish divergence of a higher low.
Finally, if we look at the start of 2018 we had fewer 52-week lows, more stocks above their 50-MA, and momentum tested its February low but did not break below it.
Now we could look at a whole host of breadth and momentum data, each likely telling a slightly different story. The tools I used in the chart above are not the focus of this post but to show that typically selling has dried up based on various metrics of market internals and trend strength by the time a final low is formed.
We can see a similar type pattern in google search trends for the term “bear market”. First, it’s interesting to observe the sentiment towards always expecting a down trend to turn into a bear market as the general public rushes to google the term when stocks move lower. However, also notice that the trend in searches for “bear market” decline going into the final low in price. These data points are monthly, so we don’t have a surgical-like view as would be most desirable. But during the GFC, search trend peaked in August ’08, in 2011 searches peaked two months before the low, and in 2016 it peaked the month before the low.
It seems people begin to lose interest in the potential for a “bear market” as the market bottoms. What causes this is beyond my area of expertise but I think part of it has to do with the data I showed in the chart above, with fewer stocks declining into the indexes bottom, things begin to feel “less bad” so the fear begins to diminish.
I last wrote about this topic on December 21st, showing another chart that often finds a low before the broad market. Currently the market is still digesting a broadening of deteriorating market breadth, being helped along by stories of Apple growth slowing down, trade wars, the gov’t shutdown, and whatever else begins the topic du jour in coming days. What I’m looking for as an active investment manager is for things to begin “less bad,” remember that the stock market truly is market of individual stocks, and what the majority of those stocks are doing will likely lead the broader indices. As I have been for the last year, I’ll be sharing more of my thoughts and analysis in my Thrasher Analytics letter.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.