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Another Reason We’ve Seen The Market Low at Trader’s Narrative

dog on a leash

About a year ago I wrote about how the stock market resembles a dog on a leash. Prices fluctuate from the trend, sometimes in extreme spikes which mark important inflection points.

I thought I’d revisit the idea by taking a long term look at the S&P 500 and comparing how it has fared to its own long term (200 moving average). To equalize things and make it comparable over time, I expressed the divergence from the mean as a percentage:

SPX percentage from 200 moving average long term chart

Looking at the data from 1950 to present, here are the rare times when the S&P 500 Index (SPX) traded at an extreme relative to its simple 200 day moving average:

  • July 26th 1962 -22.62%
  • May 26th 1970 -23.18%
  • October 4th 1974 -28.58%
  • October 19th 1987 -24.75%
  • Sept 21st 2001 -22.11%
  • July 23rd 2002 -26.98%
  • October 7th, 2002 -23.84%
  • November 20th 2008 -39.79%
  • March 9th 2009 -36.53%

The dates should be easily recognizable since they correspond to almost every single major turning point in recent market history. The numbers represent the percentage relative to the long term moving average. So on July 26th, 1962 the S&P 500 traded 22.62% below its simple 200 day moving average.

Looking at the data this way, you easily gain perspective on just how epic the recent market action has been. Not since 1929 has the market veered off so dramatically from its long term path. Put another way, if the November 2008 low doesn’t mark a significant inflection point, it will be the first time.

A quick back-of-the-envelope calculation shows that 60 trading days after these dates shown above the market is always higher, sometimes significantly:

  • 7.95%
  • 10.03%
  • 12.93%
  • 10.72%
  • 6.14%
  • 9.54%
  • 8.3%
  • 20.9%
  • I’ll revisit this when 60 days have passed from March 9th, 2009

Even if we assume that the November lows will indeed mark a significant low for the S&P 500, there is no reason to believe that prices would simply climb higher from here onward. We could enter a protracted sideways market, or we could also slowly drip lower, revisiting the previous lows. But it is difficult to argue that what we have just witnessed isn’t but a monumental and rare market event that has characterized important turning points in the past.

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24 Responses to “Another Reason We’ve Seen The Market Low”  

  1. 1 jeremy

    A good observation, with poor conclusion, technical /sentiment analysis is full of extreme readings these days, so what, we live in extraordinary times, i am not sure if from one indicator you can conclude that we have passed a monumental turning point-we could make easily new lows in April, with the 200 MA racing down to meet the Index at a lower point.

  2. 2 Stefan

    First, thanks for a great website. I would like to add some perspective to your chart, have a look at Dow Jones and the distance to it´s MA200 since 1928, instead of “only” 1960. As you wrote we are at an extreme level that has always marked a significant low…except for the 1929-32 period!

    There are alot of similarities between the 2000-2008 downturn and 1966-74 so perhaps it could stage a decent rally from here like it did in 1974, but it looks more and more like the depression era and then we will see extreme indicator levels for an extended time and the stock market still has alot of downside before it´s over.

    My blog is in swedish, but the chart itself should be easy to understand :)

  3. 3 jkw

    There is no way that we have reached the cycle lows. The CRE (commercial real estate) bust has only just begun. The residential real estate market was just a drop in the bucket compared to the losses the banks are going to be hit with this summer/fall. The credit crisis this past fall was just a preview of what’s going to become normal for at least a few years.

  4. 4 Holly

    Great comments! All 3 of you, Agree!

  5. 5 rcm

    If we had observed the current drawdown from the 200D moving average when it was at -25% in the context of previous drawdowns of that magnitude, we might have concluded that we were at a turning point, only to see the index fall another 15% over the next couple of months. That being said, we very well could be at a turning point now (personally I think there’s a lot of downside left, but I’m open to the possibility that the worst is behind us).

  6. 6 J. Wilson

    The Dow 30 fell to 40% below the 200 day moving average in November 1929, but it was not *the* bottom. The Dow would ultimately fall ANOTHER 80% from that November ‘29 low, finally bottoming out in July 1932. It would be just as valid to say that since the market has fallen more than 30% below the 200 day moving average, it has about 80% more to go before reaching bottom.

  7. 7 roam92

    # Sept 21st 2001 -22.11%
    # July 23rd 2002 -26.98%
    # October 7th, 2002 -23.84%
    # November 20th 2008 -39.79%

    Well, 3 out of 4 (some would argue 4 out of 4) of the last four dates on your list were “only” bear market rallies…

    I don’t disagree that the March 6th low was a “significant” one in this bear market - the larger question is whether it’s the final one…

  8. 8 anon

    how far was the march 5 2009 low from the 200day ma?

  9. 9 stantam

    Nice work. Must remember though, that is what is normal for any bear market. I agree, that rally is/was overdue (and in progress), but these extremes do not guarantee that a bull market is just around the corner.

  10. 10 Babak

    Hej Stefan, thanks for the chart.

    J. Wilson, good point. But that initial drop in 1929 only took the market down about 40% - we’ve gone down about 57% from the Oct 2007 top - further declines are of course possible but that’s a very significant difference so it strains any direct comparison as a play book.

    anon, good question, the low was actually March 9th low (not 5th) was 36.5% below the 200 day simple moving average. Another extreme.

  11. 11 Tom Lattimore

    Great work. However what about signals from Dow 30 stocks above their 50 day MA. It gave what I consider a sell signal. What say ye?

    Tommy J. Lattimore

  12. 12 Babak

    Tom, that’s for a much shorter time frame.

  13. 13 J. Wilson

    My point was not to predict a further 80% drop, but to call attention to just one of many data points that that invalidate the conclusion of this post, namely that the bottom is in because the market 39% below the 200MA. The unusual steepness of this bear market that you point out is yet another reason to doubt a conclusion based on the behavior of past bear markets.

    More generally, I see people everywhere fishing for reasons to convince themselves that the bottom is in, and the more I see this, the more I’m inclined to think that the bear has further to go.

  14. 14 TTB

    Great stuff as usual - BUT a few comments - The first 3 samples 1962-1974 were great range trading opportunities, but a long hold thru 1982 …. and why nothing before 1962 ?? You missed the big outlier the market extended below the 200-day in 1932 by -78.7% … not possible again? I agree with Babak … we are in November 1929 Thanks!

  15. 15 Isaac LaCotti

    I heard George Thompson , the maker of Wisetrade ,say that the S&P was going to go to 500 . Qnly he didn’t say how soon . He has been in the market for many years and has made and makes stock calls every day that make people rich . I am watching to see if this one proves to be true .

  16. 16 jack

    You can not predict the future, from reading past charts. This information is useless.
    I believe it was stated, to stimulate investment in the S&P 500 stocks.

  17. 17 juice963

    the way i see it, we need to revisit the lows and there will be a sandpaper effect. where the markets go up and down but over all side ways until we clean up the BS that created the mess.
    I say sandpaper effect, because that’s what it will feel like. sandpaper grinding your account to nothing over time
    as long as you can stay solvent you’ll be around for the next bull to start 5-8 years from now.

    this is simply a bear market rally, non one should ge thier hopes up or bet the farm on a market bottom now or ever. only invest what u can afford to loose or tie up for an extended period of time.

  18. 18 RICH

    I can hardly believe all these super intelligent observations !!!
    2or3 of them were right on. Yes you are likely to see 10,000
    before this rally is over, but you are just as likely to see DOW
    5,000 before this BEAR IS DONE with you !!!
    Good Luck, Rich

  19. 19 delbertino

    Thanx for this access to those much more experienced than I. The briefest glance at the five year s & p suggests we are at relative maximum now. I think.

  20. 20 Jim

    The only problem with all this analysis is that we are not living in normal times. This truly is the first recession ever caused by subprime, insanely overleveraged banks, an out of control global credit crisis and 30 years or ridiculous deficit spending. In contrast to ever other recession that’s begun since the depression, this one is lasting longer and the WORST MAY NOT EVEN BE HERE YET, in terms of unemployment and earnings.
    The great risk here is that future numbers come in so much worse than expected that we could have one last final drop that takes us below March. The market is being boosted now by optimism over all the government action that seems to have the promise of working. But what if it doesn’t? Then you’ll see true panic.
    I hope I’m wrong.

  21. 21 LH

    No one is going to care how big this percentage difference is when banks and insurance companies begin writing down commercial mortgages in default and people increase the run already in process on insurance companies to get out the earned value of their life insurance policies, which is not FDIC insured. That is going to put the economy back into a tailspin with another massive bout of deleveraging, most likely causing everything (stocks, bonds, commodities) to test (or possibly even drop well below) their recent lows. There is another huge wall cloud building on the economic horizon and those who ignore it do so at their own financial peril.

  22. 22 tony

    except for the last few, the “falls and rises” have not been powered by the information age tools we take for granted today. this info/mis-info availability adds to the magnitude of the market reactions we see today.maybe better to see this vs a shorter moving average, eg, 100 day

  23. 23 mmformm

    nice work.

  24. 24 Richard

    Yes, you can compare this Bear with 1929-32 with one notable exception !!!
    R.N. ELLIOTT laid out the Wave Principle almost 70 years ago and this Bear
    is one degree larger than 29-32, actually this bear is better compared to the
    1720 bear !!! This one is the same degree wave as that one was…So we have
    a long way to go in terms time and price before the bottom…Oh yes, there
    will be many very good money making rallys before we hit the bottom… Just
    be careful what and when you buy!!! You are,of course,aware that money can
    be made shortselling !!!

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