Recent price behavior vs. Historic bear market patterns: my current strategy

I have posted similar charts to today’s just a few months ago, but I thought it was time for a very quick refresher on the market patterns of today, vs. the last two significant bear markets (2000 – 2002 & 2007 – 2009).  Below are SPX weekly candlestick charts of those two periods, followed by a chart of the current bear market that began early this year. History does not precisely repeat old price pattern movements, but it can often reflect similar patterns on the stock market. Perhaps we can learn a few things by comparing these 3 time periods.

 

SPX Bear 2000 – 2002

I’ve posted this 2001 bear market chart in the past.  Note the two bear market rallies (circled in red) followed by the final washout. That washout took us down from around 1150 – below 800. That was about 30% pain from the rally point. Peak – trough of the entire bear ended up being darned near a halving of the market. The bottom was signified by a hammer candle in July 2002, but (not seen on this chart) the market moved sideways for almost another year between 2002-May 2003. That was roughly in the 800-900 range. The SPX finally moved over its 40 week/ 200 day SMA in May of 2003. The new bull market had begun.

As an aside, I was a far less disciplined trader tin those days, and took it on the chin by capturing a good chunk of the downside. I describe this in my latest book, Smart Money/ Dumb Money. I learned valuable lessons during this crash, and those lessons afforded me to manage the 2008 bear far better. I’ll discuss that below….

 

SPX Bear 2007- 2009

The 2008 crash was part of the greater sideways market that contained the SPX to a lid 1500 from 2000 to 2013. For this reason, you may note that the entire drawdown began, just as it did in 2000, at 1500. The 2008 crash was even more severe than that of 2001, with its low coming in around 700 – well over a 50% total markdown.

Just as in 2001, note the two bear market rallies on the chart below (circled in red) followed by the final washout. The 2008 bear ended with an engulfing candlestick pattern.  The official bear market was verified as over as the H&H bottom formation neckline breaking in May 2009, along with a move above the 40 week/ 200 day SMA. Whether a H&S consolidation in 2009, or the rectangular consolidation seen in 2002 – both era’s saw a final big washout with a prolonged consolidation period.  The final washout in 2008 was over 40%.

ValueTrend began buying AFTER the breakout signal in May 2009, having held about 35% cash in our Equity Model for much of the bear market. This afforded us to break-even by March 2010.  The SPX (and many investors) didn’t break-even for 3 more years. We are following the same strategy in the current market. More on that below.

I discuss how to identify those patterns in my latest book, and in my Online Technical Analysis Course. If you have not taken the course, I recommend you do so. It contains my entire money management and trading system, designed to be a blueprint for anyone serious about managing their portfolio correctly.

2022- ? Bear market

You can see that the bear market staged two rallies with similar consistencies as in 2001 and 2008. The difference this time appears to be an attempt by the SPX to challenge the peak of the last bear market rally. Note that the 4170 resistance that I have been speaking of lately, is  being tested on the chart below.  The last two bear markets did NOT see a rally that tested the prior rally peak. If 4170 holds over the next few days, the market may have begun its bottoming phase. Perhaps the June washout, as small as it was on a relative (to other bear markets) basis, is all we will get.

Possible chart discrepancies, beyond the recent test of the last high vs. prior bear markets:

  • The lack of a washout candlestick. Typically, investor panic causes some sort of high/low reversal or engulfing candle (again, refer to my Online TA course to learn what to look for). We didn’t get a reversal candle in June…. food for thought.
  • If June was the final washout, that was a pretty wimpy washout by prior bear market standards. This june saw about 10% downside since the May peak vs. 30% washout in 2002, and 40%+ in 2009.
  • The total bear market damage would have only fallen about 23% peak-trough if June 2022 was the bottom. That is vastly less pain than past bears.
  • This bear has only been in play for 7 months or so. The above two bears lasted 2 + years.

 

Conclusion

Seasonal patterns – if they play out – can spell problems for markets in late August and September. Sometimes it can get dicey after the Labor Day weekend at the end of this month. However, trend trumps all. If the SPX remains over 4170 into the next number of days, my discipline will force me to begin legging in with our 32% cash. However, we remain pretty cautious about things, and would step in with small amounts a little at a time over a number of weeks. Again – this assumes the SPX remains over the 4170 level. Craig and I discussed our playbook this morning, and agreed that, if we are forced to begin stepping in, we will do it slowly, and reverse our stance (cash out again) upon any sign of weakness. This is one of those times where its better to fight the FOMO (Fear of Missing Out) emotion, and follow your disciplined approach (again – as taught in my Online Course).

MoneyShow Speaking Engagement

After 2 years of COVID lockdowns – I am happy to announce that I will be doing a live speaking engarement for the MoneyShow on Saturday September the 17th. I’d love to get to meet some of my readers in person, and answer any questions you may have. I will, of course, be providing a view of the markets during my talk. But the exciting thing about this talk is that it is a re-do of a seminar I gave for my CSTA colleagues covering investor sentiment signals. I promise you will walk out of my talk with new insights on contrarian investing.

Market it on your calendar! Click the picture below for details on my appearance, and to register:

 

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6 Comments

  • It is interesting the various views on oil prices from technical traders. I know you are bullish yet Chris Vermeulen believes continued decline in Crude Oil, as well as a continued strengthening of the US Dollar, will likely take place throughout the end of 2022.

    Reply
    • I am bullish in a longer termed sense–anything can happen to the end of this year. But longer termed commodity cycles suggest oil will be a leader out further. This video will be useful: https://www.valuetrend.ca/video/outlook-for-commodities/
      As noted, we cut our energy exposure form 30% to 6% quite a while ago (we still hold that 6% mind you) – and have yet to add back. But, I anticipate, so long as I see the technical pick up again, going back in at some point. Often a great point to buy is in the early winter (Feb) as we head towards the spring driving season.

      Reply
  • hi Keith – great blog as always. trying to find a chart that compares SPX drops then movement into mid term presidential elections. – Cant find it anywhere, not sure you looked at it from a macro point of view..Took your course but your comment about watching 4170 is into it’s 3rd day. Couple this with the midterm “pump to get the house” may be in play. I am thinking shorting oil until November vs buying the dip based on the elusive chart to confirm legging in… thoughts??

    Reply
    • David–I actually printed such a chart on this blog (see “reason # 1”) : https://www.valuetrend.ca/4-reasons-i-dont-trust-this-rally/

      Recall that the 3 day rule is a minimum. We are waiting until next week before doing anything. I still don’t trust this rally. But, rules is rules, as discussed on this blog. I’m certainly not going in full throttle next week- even if I am forced to buy.

      Don’t know about shorting oil–we are staying light on the sector until the technical pictures starts to pick up (ie price shows a bit of neartermed momentum). Long term, we like the sector but to your point, not in the nearterm so much.

      Reply
  • “The course… contains my entire money management and trading system, designed to be a blueprint for anyone serious about managing their portfolio correctly.”

    Keith– For most of the summer, I’ve slowly been working to put together a trading plan. It’s been a bit excruciating.

    Psychological discipline, assessing risk/reward, finding stop levels, calculating position sizing based on max risk… these I can get a handle on, and understand their importance.

    But strategies! This is overwhelming : Darvas boxes, Donchian channels, Moving average crossovers, Bollinger-band support, etc… Some strategies seem simple, but are they too much so? Some are complicated to the point that I would not know if I’m even executing them properly.

    I’ve bought, but so far only perused, the course contents. But I gather it contains what I’ll need to create a simple, effective strategy to follow? And any comment on the head-spinning array of strategies out there?

    Reply
    • Andy–I think you will find that my course is the most direct, easy to follow system out there. No fancy-pants stuff. I designed it to be a step by step easy to understand process that encompasses all of the vital parts of forming a trading process – without bogging you down with things you really don’t need to know (no matter how “cool” some of the tools in TA sound!).

      Reply

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