Welcome to the new market regime, young lads. Many of us, and many more that are way older than me, have seen plenty of bear markets. At our shop, we rely heavily on global markets to give us information about stocks as an asset class, so we’re accustomed to seeing bear markets all the time. It’s nothing new to us. But I understand that many of you are new to this whole up AND down thing. It’s normal, I promise.

Today I want to stress an important point that I think gets forgotten: The biggest stock market rallies come in bear markets! You don’t get 6% rallies in the Dow when we’re in healthy uptrends! You need serious volatility to spark something like that, and it only happens when risk is extremely elevated. I’m sure you’ve noticed that we’re getting much bigger down days AND up days in the market lately. This is not characteristic of the type of environment where stocks are going up. It’s the type of behavior we see, historically, when stocks are going down. This is one of many reasons why we’ve wanted to sell stocks throughout October.

A great place to look up good information is the annual Stock Traders Almanac (shout out to my pal Jeff Hirsch). In the back of every issue is a list of the biggest point swings, both up and down. It’s a really cool set of 10-12 pages and I encourage you to go check it out. They do a nice job of splitting up the market to compare data pre-1950 and post-1950. The Almanac always points out that before 1950, farming was a major portion of the U.S. economy, so the world was a much different place.

If you look at the top 10 biggest rallies, percentage-wise, in the Dow Jones Industrial Average before 1950, they all took place in the following years: 1929, 1931, 1932 & 1933. These years represent some of the worst bear markets of all time.

Moving into more recent periods, we want to find the top 10 best days since 1950. They all took place in 1987, 2002, 2008 & 2009. Again, these are some of the worst times to buy stocks in our lifetime.

I’ve been talking about this specific characteristic of downtrends all month:

Remember the biggest rallies of all time have come within the context of a bear market. It’s actually very normal. Let’s keep that in mind if we get a few of those this month. — J.C. Parets (@allstarcharts) October 12, 2018

You’re going to see headlines like these. Expect them. But we want to remember that they come in these types of markets:

It’s normal. I don’t think we have to overthink it. We’ve been down this road before. We have a list of characteristics of the types of things that stocks do when they’re in bull markets and how they behave when they’re in bear markets. It’s been very clear all month that we’ve seen an overwhelming amount of evidence of bear market behavior and little or no evidence of a bull market for stocks.

That’s how I continue to see things.

Let me know what you think

JC

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