Is the market a bottomless pit?

After seeing the market go up 5% earlier this week, only to retrace gains at the tail end of the week, is this market a bottomless pit?

I recently wrote about the fallacy of waiting for things to normalize. This week proved the point all too well, as a primary catalyst for the market activity is unemployment. Larger gains earlier in the week were driven by the potential for softening job data.

Why would the market want weaker jobs numbers? Well, potentially it slows down an aggressive Fed.

Instead, Friday’s jobs report showed unemployment declined further. Treasury yields quickly jumped, signaling investors anticipate another big move by the Fed. With no peak to inflation evident, Chair Powell has been clear jobs is the next indicator guiding their path.

Strong jobs numbers, keep tightening. Weaker jobs numbers, consider holding.

Statistics on market bottoms

While the past two days looked and felt brutal, stocks did finish higher on the week. The Dow rose 2%, the S&P up 1.5%, and the Nasdaq finished up 0.7%.

As I was driving to the office this morning and listening to this week’s The Compound and Friends episode (you can watch the episode here), I heard a stat that caught my attention. I later found on Twitter the chart and stats they reference, which you can see here:

In plain language, the market making a big two-day move while trading below its 200 day moving average has only happened 11 other times.

I went back and looked at those 11 other times. The data shows that each time this exact move has occurred was near the bottom of a down market cycle. Not at the bottom, but near it.

What this shows is in each of these cases, there was an average draw down of another almost 16% over a period of about 52 days. Then, a new leg up formed for an average return of ~19% over a period of about 252 days.

Even more simply stated, each time the market retested the lows or made a new low. Then a new bull market started.

What does this mean for you?

First, bear markets tend to be short-lived. The average length of a bear market is 289 days, or about 9.6 months. The average length of a bull market is 991 days or 2.7 years. Stocks rise 78% of the time historically.

Second, we’re simply not out of the woods yet. In fact, as the data above shows, we must be prepared for more pain that is likely coming for a few more weeks if the trend holds true this time around.

Third, if this holds true, we may finally begin to see capitulation. This is when investors simply give up and sell out. In prior periods, this is what helped drive the ensuing market decline. However, it should be noted that capitulation itself does not signal a bottom indicator!

Fourth, there are still so many other factors influencing the market. Oil, interest rates, inflation, elections, Ukraine conflict, China. There’s also demand-side economics and the upcoming holidays, corporate earnings, etc.

Finally, the news will continue to be negative, so carefully guard your media exposure. Watch enough of that and you will be ready to give up – it’s why I don’t have it on in my office!

These are not easy times for investors. Lean on your financial advisor (hi – that’s me!) to help you understand how this period of time directly impacts your financial situation, both now and in the future.

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