Tue 6 Mar 2007
I found a good little blurb (and a good chart) on Ticker Sense regarding the S&P 500’s 5% decline and previous such declines…
With today’s near 1% decline, the S&P 500 is now down 5.86% form its peak on 2/20. This is the seventh time during this bull market that the S&P 500 has declined by 5% or more from a peak. In [the chart], we plot the S&P 500 highlighting each correction in red. The lower chart shows the percentage decline in each correction on a cumulative basis (from peak to trough).
On average, declines have lasted an average of 74 calendar days. Once the market does reach its low point, it has taken an average of 64 calendar days to recoup the losses.
While looking at historical patterns can mislead as easily as it can enlighten, it is worth noting that we’re not talking about a short-term one-week dip and one week recovery here.? With an average decline timeframe of 74 calendar days, we aren’t going to see the markets make new highs tomorrow if/when a recovery starts.
One important question to ask regarding such historical analysis…? what is different this time?? What would make this decline different from the others?? I can think of a few reasons…
- The Fed is in the way (the last action was a rate hike), though this was true during last summer’s decline too
- Other central banks have been raising rates with the Fed
- We’ve shed nearly 6% in only 10 trading days
- Corporate earnings are high, which could be a peak in the business cycle
Does anyone else have reasons why this decline will be different — for bearish or bullish reasons?? Think the outcome will be bullish (a recovery and more new highs) or bearish (lower highs and lower lows)?
March 7th, 2007 at 7:49 am
I’ve been hearing about the decline of the Yen carry trades and how that might reduce liquidity, so that could make this contraction a bit tighter. It’s been interesting seeing the strong gyrations in one country (China) cause this ripple effect. I think there are many, many people now who have profited from this extended bull run, providing more potential profit-takers and sellers. That’s what hurts every bull rally – if it goes on for long enough there will be a horde of profit takers ready to cash out and capitalize on the late-comers. I think this bull has accumulated a lot of potential profit takers.
March 7th, 2007 at 2:04 pm
This is a good read regarding 5% drops:
http://bigpicture.typepad.com/comments/2007/03/large_5day_decl.html
Among the notable quotes: “…in each period shown, if the market showed losses after the first week, it remained in the red for the two week and one month periods as well.”