We’ve posted repeatedly about the need for stocks, given the historical limitations of cyclical bull market rallies within secular bears, to sell hard and fast at this juncture if they are going to fall at all.
We’ve also noted many times that if they fail to fall hard and fast, there’s some crazy possibility that we might not even be in a secular bear anymore.
Which brings us to the data we came across today.
Specifically, we noticed that on 7/24 the DJIA had been up less than 37% of the trailing 60 trading days/1Q.
We also noticed that over that time the index had fallen only 4.5%.
So, we went through daily DJIA trading data back to 1896 and filtered for the following:
- DJIA up < 37% of trailing 60 trading days /1Q
- DJIA return > -5% over the same period
There were 27 instances of this through history. We also noted that after receiving this signal on 7/24 that the DJIA was up 3% one week later. When we add the qualification that the market be up
The following is what we were left with – the locations on the chart where this has happened in the past along with the forward returns are simply amazing.
While the signal has only been generated a handful of times, they’ve come at rather important milestones for the market including:
- End of the Great Depression sell-off in 1932
- A few years before the secular bull of 1950-1966 began
- In 1956 about a year before the last leg of the aforementioned 1950-1966 secular bull got underway (market traded sideways for a few years; no downside)
- At the 1974 lows following a ~50% sell-off
- August 1982 right as history’s greatest secular bull began
Moreover, after this signal was flagged on 7/24, the DJIA managed a 3% gain over the next week by 7/31. Here is what forward returns have been like for DJIA after fulfilling the two qualifications above and then also generating a positive one week return thereafter.
The worse six month forward return after this signal has been generated was an immaterial -1.4%.
Moreover, the market has been up 93% of the time at the 6 month mark and 100% of the time at the 12 month mark.
There was one 35% draw-down in 1915 after receiving this signal in 1913 that falls outside of this analysis as it was beyond the +12 month mark.
However, this loss was caused by the onset of WW1 whereby the market had been closed for multiple months before closing down ~25% on a single day when it reopened. Quite the anomoly. Additionally, those losses were made up by the market nearly immediately.
In a nutshell, it appears this type of signal has generally only occurred in environments of selling apathy.
In other words, the signal seems to occur at points in time when the market has exhausted selling pressure and instead, is coiling up for a material move higher, either imminently, or within a few years.
Don’t shoot the messenger, but if this data set is real, it appears as if profiting from the bear side of the equation could be difficult in the future.
Again, much of history suggests that if stocks are about to begin the last leg of their secular bear move lower, that move likely needs to happen right here and now.