Bear Markets Typically Include Big Daily Gains

August 10, 2011

During a bear run, it is much more common to experience out-sized daily rises in share prices such as occurred on August 9 than during normal periods of sideways or upward sloping trends.  During the collapse of 2008-09, there were numerous such days.  The brunt of that bear market was compressed between the collapse of Lehman Brothers on the weekend of September 13-14, 2008 and the market’s lowest close on March 9, 2009.  Over that span of 121 trading days, the DOW tumbled 42.7% from 11,422 to 6,547. 

In one out of every five of those sessions, the DOW advanced by at least 2.0%.  There were seven daily gains of 2.0-2.9%, nine rises of between 3.0% and 4.0%, four of at least 4.0% but less than 5.0%, one of 6.5%, and yet another of 6.7%.  The second largest single-day increase during that span was a gain of 10.9% on October 28, and the biggest one was an 11.1% upsurge on October 13.

This year, the DOW declined 15.0% over the dozen trading days between July 21 and August 8.  That actually compares rather impressively with twelve-session cumulative declines experienced in the 2008-09 period.  The largest such 12-session decrease after November 20 was a fall of 14.7% in the sequence through March 2nd.  The twelve sessions to November 20 saw the index slump 21.5%, but the 12 sessions to November 19 had a smaller-than-15% loss of 14.2%.  All of the previous 12-session drops of at least 15% were compressed between October 7 and October 17, and those declines ranged from 14.8% to 21.9%.  Altogether only nine times between the collapse of Lehman Brothers and the end of the bear market was the 12-session loss greater than the 15% slide observed recently, and all but one of those instances were bunched in mid-October 2008.

Some analysts think 2008-9 cannot be repeated now because share prices do not not appear as overpriced by the usual standard measures as they appeared to be at the beginning of that earlier episode.  I do not find such yardsticks compelling.  In a bear market, the problem is not so much one of rationally determined valuation as one of runaway emotion.  Investors aren’t looking at the here and now but rather at the whole economy’s present value.  When people wonder if its possible that the United States now could be analogous to Rome in the 470s, Spain in the 1580s, Germany in the 1920s, or Japan in the 1980s, who’s to say that the market will drop only so far and no lower?

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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