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Conditions Of New Bull Market: 20% Or More Drop at 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:

bear market correction 20 percent dow jones spx

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.

Technically, this condition isn’t met.

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2 Responses to “Conditions Of New Bull Market: 20% Or More Drop”  

  1. 1 Kiansoon

    I was wondering with the recent drop in the indices, is the 20% drop rule fulfilled? if not, how much more drop is needed, corresponding to what level?

  2. 2 Babak

    since the drop is calculated from top to bottom and since we haven’t plumbed new depths, what I wrote above still stands. The October highs are still the swing high and the March lows are the swing lows, so just shy of -20% at around a 19% drop.

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