We remain long-term bulls as previously highlighted in our blog post of February 14, 2019. Despite this long-term view, in that blog post I cautioned that “it would be in line with history to see markets retest lows before the start of a cyclical bull market.” In our never-ending quest to understand markets and make sound, data driven logical decisions it is important to have a firm grasp on market history. Below is a more idiosyncratic look at the history of retests.
Data on Retests
Ned Davis Research (NDR) recently published some statistics on retests. The data highlights markets over the last 20 years with a similar pattern as the current market; a 10% plus rally after hitting a nine-month low within a downtrend (defined by a downward sloping 200 day moving average).
As of this writing and updated from the 2/20/19 data point in the above chart, the current rally from the lows put in place in late December has major indexes up approximately 16% off the bottom. This snapback is very much in line with the rally statistics in the above table. It has been 52 days since the bottom, also in line. These statistics are falling in line with recent history. The median decline from peak to final bottom has historically been 15.4% in this data set. If we declined 15% from here the market would be close to the lows of late December. According to the table, the median decline lasts about 90 days. Will the future also be in line with history?
I would caution that the above table is a small sample size and three out of the five markets with similar characteristics occurred during a long-term (secular) bear market in stocks from 2000-2009. Bear markets within long-term (secular) bull markets tend to be more resilient than bear markets within long-term bear markets as can be seen in the table below.
Therefore, it stands to reason that the market may also be more resilient than the data from NDR would suggest and Investors might consider buying before the lows are fully retested!
Markets are the ultimate forward indicator, and technicals help us understand what the market is telling us. You can see in the below chart that the S&P 500 broke above its 200-day moving average. It has now held above this 200-day moving average long enough to suggest, in my view, that the risk we have a global recession due to an escalating trade war and policy mistakes, the main concern the market was worried about in late December, is likely off the table. If that is off the table, retesting lows is less likely. At the same time, RSI, a measure of how overbought or oversold the market is, is high (suggesting overbought).
This overbought condition aligns with sentiment readings that suggest a lot of good news is already priced in. When markets are optimistic, more good news has much less positive impact than when markets are pessimistic.
This would suggest a pullback is more likely that a continued advance. Of course, let’s not forget that markets could go up from here. We are not over-confident in making market predictions, so we will continue to follow the data and be flexible in our approach. There are always opportunities created in choppy markets, and we stand ready to continue to execute on those opportunities as they arise. However, for now, odds favor a retrench and a buying opportunity above retest levels.