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Current Market In Line With Post-Bear Market Rallies at Trader’s Narrative

If you’ve been watching the market climb ceaselessly for the past year, it may come as a shock to learn that what we’ve witnessed is not at all atypical after a very deep bear market.

There have been only a few bear markets where the Dow Jones has fallen by more than 50%. Of course, there was the recent bear market from 2007-2009, the other two were the bear markets of the 1929’s and early 1930’s. If we also take into account the NASDAQ dot com bubble, which took that index down almost 80%, we have a fourth example. In each case, the market came roaring back, not unlike what we have seen so far:

post massive bear market rallies Apr 2010
Source: Chart of the Day

This rally may have left many “unbelievers” behind but, as you can see, from a historical point of view, it is anything but unusual. In fact, the closest approximation is the 2003 cyclical bull market rally which also started in March. Of course, persevering readers may remember that I’ve made the comparison to this previous bull market many times.

The average recovery lasted for one and a half years (between 300 and trading 370 days). The S&P 500 index is now 77% higher (from the March 2009 lows) and the Dow Industrial is about 68% higher. This smaller sample of massive bear markets (more than 50%) agrees with the more comprehensive study of the historical aftermath of secular bear markets:

Click to see larger chart in a new tab:
aftermath of secular bear markets morgan stanley research

The average recovery lasted 17 months or about 5 more months from where we are now (taking us to August 2010) and reinflated the indexes by 70% - in line with where we are now. The next stage is a trading range that starts with a small correction of about 25%. This sideways action would dovetail with the options sentiment data.

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One Response to “Current Market In Line With Post-Bear Market Rallies”  

  1. 1 Wes

    Babak, for what it’s worth, while we are closely tracking the 2003 bull market, the valuation metric I follow (proprietary) is just now about back to the beginning level of the 2003 market. To the extent that markets track value, this one should carry much higher than in 2003.

    We’ll see.

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