Perspective for Market Pullbacks

Monday, October 20, 2014

By Sheila & Rich Jamison -

Last week we examined October markets in general to gain perspective on their historical behavior. The preceding week’s volatility dictated this exploration. And though Octobers have been volatile overall, volatility this past week was especially nerve wracking.

1525.04 Point DJIA Roller Coaster

The Dow Jones Industrial Average (DJIA) plowed back and forth through more than 1,500 points over the week, approximately 460 just on Wednesday. So let’s focus specifically on pullbacks today instead of Octobers.

S&P 500’s Imitates the Ride

On September 19th, 2014, the S&P 500 index hit an intraday high of 2019.26. From that point to the intra-day low on October 15th (1820.66), the S&P 500 was down 9.8%. This may seem a rather swift move in less than one month’s time. However, it’s a move that is not outside the realm of “normal” market movements.

But It’s “Roll Bars” Are Still Working

In spite of a couple near term sell signals and being extremely oversold, our technical charts for the S&P 500 (SPX) shows that it continues to trade in an overall positive trend. As a result of Wednesday’s market action (and SPX’s low point for the week), SPX fell far enough to test the bullish support line. So far, that support has been able to hold. (Memory jogger for technical analysis – bullish support often acts like a brick wall under a security.)

Pretty Much Like They Have Before

While this pullback has been a bit steeper than the past few, compared to history (technically speaking) it has shown a ‘so-what?’ similarity. For instance, the pullbacks in June 2013, February 2014, and April 2014 all consisted of two sell signals on the chart and all came within the confines of a positive trend.

The current pullback would have to drop to 1800-1810 in order to violate the bullish support line and shift the overall trend of this index into being negative. Thus, for now we have to say the trend of this index is still up. That is, nothing unusual here that should engender undue concern, let alone panic.

Is It Just Because We’ve Forgotten?

We’ve looked at 10% market pullbacks before, noting the recent lack of such of activity over the past couple of years. Using the closing S&P 500 prices, we find the market has pulled back by at least 10% 93 times since 1928. Thus, over an 86 year time frame, the market has pulled back by 10% slightly more than once per year.

But we haven’t experienced this since 2011. Then the S&P 500 pulled back a little over 19% from April 29th to October 3rd. That means we have been three years without experiencing a 10% pullback.

And while we have not hit that mark yet this year, this might be why this recent market pullback has felt a bit worse than the numbers might suggest. From the S&P 500’s highest close this year (2011.36 on September 18th) to the 1862.49 close on October 15th, the S&P 500 has pulled back 7.4%.

Are We Due?

On the face of it, if you used historical averages (and you know how cautious I am about averages*), the market looks like it is certainly “due” for a 10% correction. However, there is precedent for the market to go prolonged periods of time between 10% pullbacks.

4 to 7 Years Without One?

For instance, it was 4½ years between 10% corrections from the bottom in March 2003 to November 2007. That was during a structural bear market, when you might most expect large pullbacks.

From the early ‘80’s through the end of 1999 (the last structural bull market), during one stretch the S&P 500 went roughly seven years between 10% pullbacks (from August 1990 to October 1997).

In order for the current market to register a 10% pullback, we would need to see the S&P 500 close at or below 1810.22.

But We Have Hit 5% … Lots of Times

Though we haven’t the 10% mark, we have seen a 5% correction since September’s market high. This is a far more frequent occurrence than a 10% correction. Compared to 10% pullbacks averaging about once per year, 5% pullbacks average about 3½ times per year. Over 86 years, the S&P 500 has pulled back by 5% 298 times. In fact, this current dip is the second 5% pullback for the S&P 500 in 2014.

While this recent pullback has certainly felt bad, here are some stats on 5% market pullbacks that may help put today’s market into further perspective.

  • Since the bottom in 2009 we’ve had 20 pullbacks of at least 5% (including the current one).

  • On average, you get another 2.12% downside after the day you reach 5% down. That number seems to be pretty steady across different bull markets (2003-2007 and even 82-99, excluding October 87).

  • During the 2009-to-now rally, it’s taken 7 days after reaching 5% down to reach the actual low (on average). For the most recent pullback, October 10th is the date we hit the 5% down mark. Seven calendar days from that was Friday, October 17th.

  • While the average is 7 days from hitting the 5% pullback mark to finding a bottom, the longest stretch was 24 days (November 2011) and the shortest was zero days, which occurred multiple times.

I hope this makes you feel a little more comfortable (or at least, less uneasy) in the face of the past week’s market fireworks. they are not unknown. they are not even unexpected. The past the makes most of us uneasy is the inability to know when to expect them.

If you’d like to discuss how this affects your portfolio, please give us a call. We always have time for you.

*Please keep in mind the limitations of averages. While they are often useful, they can be misleading. Overcook one chicken by an hour and undercook an equivalent chicken by one hour. On average, you have two perfectly cooked chickens. Looking at them one by one is a different story.

The Daily Equity & Market Report. Dorsey Wright Staff. Dorseywright.com. October 16, 2014.
Charts and historical market data taken from the following on October 19, 2014: Dorseywright.com, Finance.yahoo.com and  Investing.com.

The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy.
Interpretations of the data, views and/or opinions expressed are those of the Jamison Financial Group based on market and economic conditions as of October 17, 2014 and are subject to change. They do not necessarily reflect the opinions of any other individual, group or organization.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities whenever mentioned are for illustrative purposes only and may not be relied upon as investment advice.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
The NASDAQ Composite is a market-weighted index of all the over-the-counter common stocks traded on the NASDAQ system.
The S&P 500® is a market-capitalization-weighted index of common stocks.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.
Past performance is no guarantee of future results.

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