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Features
Weekly Market Strategy
Portfolio Strategy
Retest Bets & Fallen Manias
Following a successful retest of its October 27 low last Thursday, the 3-week S&P 500 bear market rally is still alive for now. We view this retest as one of two steps required before talking about a bottom. Since 1929, 12 of the 14 bear markets have retested their lows but bottoms have only been declared once the 50-day MA moved above the 200-day MA. Investors waiting for the bottom to be safely declared could miss approximately 57% of the S&P 500's 1-Yr post-trough rebound. Longer term, patience is greatly rewarded as only 17% of the ensuing bull market returns is earned during the initial rebound. Retesting only offers short term relief and it is still too early to bet on last week's retest. We have updated our mania charts and parallels between previous manias (Technology, Japanese equities) and the most recent one (commodities) are still interesting. If we had a nickel for every time reporters, clients, or relatives have asked that daunting question in recent weeks, we could certainly do our part in bailing out the ailing global financial system. But since equity market troughs and peaks share one very important characteristic (they occur without anyone knowing it and are only confirmed
a posteriori), you only know you have hit bottom once you have convincingly passed it. Calling the bottom is a dangerous game but we believe highlighting when the probability of having bottomed increases is an important aspect in today's markets. Admittedly, trying to pick the bottom in a bear market is a risky, if not impossible proposition. In the dying days of bull markets, logic takes a backseat to exuberant sentiment, just like pessimism overrides fundamentals when bear markets are ready to ride in the sunset. The point of this weekly comment is not to dazzle anybody with wishful thinking numbers that could make investors (and ourselves) feel good. The point of this note is to discuss the typical bottoming process witnessed in previous bear markets and, more importantly, highlight if investors can afford to be patient and sit out the first wave of the rally. Hence, we believe the following review of S&P500 historical bear market bottoms and rallies can offer an interesting strategy road map. Following a successful retest of its October lows last Thursday, the S&P 500 bear market rally has managed to stay alive. We would view this retest as one of two steps that are required to call a bottom.- Vincent Delisle, CFA –
Director, Portfolio Strategy