What Does a Stock Market Bottom Look Like?
09/07/2015 6:00 am EST
Chris Ciovacco, at Ciovacco Capital Management, takes a historical look at the charts of the S&P 500 through the past 25 years—as well as some popular songs during each era—to illustrate how history and human behavior can help traders identify patterns that may appear during a correction and subsequent bottoming process.
History Helps with Flexibility
Since the S&P 500 recently completed a very rare period of V-bottoms, it is easy to visualize and understand the "rapid bottom and push to new highs" case for stocks. Recency bias tells us we may have pushed other historical examples to the side.
Humans Act in Similar Ways
Since it is important we remain flexible and open to all outcomes, the charts below can help us with the "what if stocks do not bottom for weeks or months?" scenarios. The charts below can also help us better identify patterns and candlesticks that may appear during a correction and subsequent bottoming process.
1990—U Can't Touch This
In 1990, MC Hammer was near the top of the charts. Stocks were on the lower end of the charts—peaking in July—and then making a series of lower lows before finding a bottom.
1994—All I Wanna Do
Sheryl Crow reminded us to stop and smell the roses. The stock market smelled nothing like roses, making a low in early April. Equities did not turn up convincingly until mid-May.
1997—Staring at the Sun
U2's big 1997 hit required respect for your corneas. Stocks also required a look away period, dropping significantly between mid-March and mid-April. Several green days were mixed in for confusion purposes.
1998—Time of Your Life
Green Day's 1998 hit would later be used in the final episode of Seinfeld. Stocks told a story about nothing, correcting in an up and down manner for almost three months.
In 1999, a guy from Detroit said he "wanted to be a Cowboy," which seemed a bit odd. Stocks were dealing with an odd fear about computers crashing at midnight on December 31. Many countertrend rallies were fully retraced before a final low was made.
NEXT PAGE: The Song Stylings and Bottom Processes for the New Millennium|pagebreak|
2004—Are You Gonna Be My Girl?
A band named Jet asked an age old question. Stocks were a mess, making three lower lows during an established daily downtrend.
Weezer's song about Jed Clampett's stomping ground seemed to fit well with the still inflating housing bubble. Stocks found a low in March before making the low in April.
Gnarls Barkley had many of us sports fans wondering if things were amiss with the spell checkers. Crazy fit right in with housing prices. Rather than dropping for five minutes and then going on to make a new high (see 2013-2014), the S&P 500 followed a more traditional bottoming process path.
2010—Back Against the Wall
In 2010, Cage the White Elephant could have been singing about the European Central Bank or Greece. The bottoming process looked eerily similar to 2006.
2011—On the Floor
In 2011 a guy named Pitbull did a duet with Jennifer Lopez. Pitbull would eventually land in a Dr. Pepper commercial on the beach (he looked about as comfortable as Richard Nixon on the beach). Anyway, I digress. Stocks spent a good part of the year On the Floor and did not bottom until October.
By Chris Ciovacco at Ciovacco Capital Management