Blue Oyster fans know this lyric well...
"All our times have come
Here but now they're gone
Seasons don't fear the reaper
Nor do the wind, the sun or the rain, we can be like they are"
You might be wondering what the heck this has to do with the current state of the stock market? If you'll just be a little patient, the answer will be revealed.
Recession and Bear Market talk has gone viral
Scary headlines are popping up everywhere. Here's a sampling:
- Dow tumbles 800 points in biggest one-day fall of year on global economic growth slowdown
- Bank stocks take a beating as inverted yield curve fuels recession fears
- The U.S. Treasury 2-10 year yield curve inverted and that means stocks are on ‘borrowed time,’ says Bank of America
- Stock Sell-Off Deepens in Asia on Recession Fears
- Oil Slips as Swelling Stockpiles Alarm Already-Panicked Market
- RBA Warns World at Risk of ‘Self-Fulfilling Downturn’
- ‘CRAZY INVERTED YIELD CURVE!’ — Trump rips ‘clueless Jay Powell’ and the Fed as the market slides
- The Yield "Curve" Knows a Recession is Coming
- Tech Stocks are Taking a Beating because they're Overpriced
- Retail Stocks are Getting Hammered because Shoppers are Scared of what's coming next
Everyone take a breath - the recession and the monster bear market aren't here. At least not yet.
This part gets a little wonky, but bear with me. As a student of the market, I look for significant events that could possibly change the market trajectory from bullish to bearish or vice versa. One of these events is the 10-to-1 day.
These events are quite rare in market history. They happen when either fear or optimism is so extreme that the number of stocks that are up (or down) exceed the number of stocks that are down (or up). This event signifies an extreme bullish or bearish sentiment among investors, but only for one day.
What caught my attention was the fact that we've had two of these rare events in the last 8 trading days. And they were both bearish (market down a lot). The last time I can recall this happening was in 2008, but I wanted to check and find out if my memory and my assumptions were correct.
Who or what is the Reaper in this scenario?
Today's Reaper was the ugly 85 point beat-down in the S&P 500, accompanied by a negative 10-to-1 up/down volume reading. This was the 2nd such event within the last 8 trading days, and it has investors justifiably concerned about what's coming next.
My research into what has happened in the market after these big 1-day moves, over the following 3 months, 6 months, and 1 year, have yielded some surprising results - at least to me. Here's a brief summary of the results.
Take a close look at the above table. What surprised me is the fact that the market has performed better after big down days than big up days. Better at all 3 time intervals.
Furthermore, it makes no difference if there are two of these events in close proximity. My take on this is that big moves in a single day don't have much predictive value. The results were counter intuitive to me, but they are what they are.
Final thoughts
What I learned today is that these rare market events are not to be feared or celebrated. The financial media makes a big hairy deal about them, but that's how they get eyeballs and clicks.
So, don't fear the Reaper... yet. Keep your powder dry and your head on a swivel because one day the Reaper will show up. Just not today.
(If you want to see my full spreadsheet with all 350 extreme market days, email me at info@zeninvestor.org)