Trader’s Narrative

Continuing the installments of what conditions precede new bull markets, here is one that should be very obvious.

Jim Stack says that the Dow Jones Industrial should drop at least 20% from its top. Here’s a chart of the Dow Jones and the S&P 500 from their respective tops to the bottom in March:

Although the Dow is still the most commonly used index for the stock market, I also added the S&P 500 to the chart. Since it uses capitalization weight it is a better index.

The Dow Jones Industrial fell 16.4% from October 2007 to the March 2008 bottom. The S&P 500 fell a bit more: 18.64%.

If we exaggerate the constraints and rather than the close, use the high and the low, we get a 20% drop for the S&P 500. But still not for the Dow - it only reaches 18%.

In any case, the point isn’t to “cheat” to be able to reach some synthetic level. Lets face it, although most people put the classic definition of a bear market as one that has fallen 20% or more, there is nothing really magical about that level.

Much more important is the fact it represents a wash out of sentiment because if a major index like the Dow or S&P 500 falls 20% or more, then weaker stocks will fall much harder.

Conclusion
Technically, this condition isn’t met.