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Market History and Waterfall Declines

04/02/2020 5:00 am EST

Focus: MARKETS

Jeffrey Hirsch

Editor-in-Chief, The Stock Trader's Almanac; Almanac Investor

While we are all rooting for the market to find support here so much damage has been done. A great deal of uncertainty remains for the economy and health crisis, explains Jeffrey Hirsch, seasonal market timing expert and editor of Stock Trader's Almanac.

History suggests that we are in for some tough sledding in the market this year with quite a bit of chop. When the January Barometer came in with a negative reading our outlook for 2020 began to diminish as every down January since 1950 has been followed by a new or continuing bear market, a 10% correction or a flat year.

Then another warning sign flashed when DJIA closed below its December closing low on February 26, 2020 as the impact of this novel coronavirus began to take its toll on Wall Street.

In the March Outlook we presented this graph of the composite seasonal pattern for the 22 years since 1950 when both the January Barometer as measured by the S&P 500 were down and the Dow closed below its previous December closing low in the first quarter.

Below we have added DJIA, S&P 500 and NASDAQ Composite for 2020 year-to-date as of the close on March 25. Comparing 2020 market action to these 22 years, suggests a choppy year ahead with the potential for several tests of the recent low.

DJIA, S&P 500 and NASDAQ Composite

The depth of this waterfall decline may be too deep for the market to rebound quickly. This bear market also put this year’s Best Six Months (November-April) at risk of being negative.

The record of down Best Six Months is not encouraging. The table below of the "Down Best Six Months" for DJIA since 1950 also suggests caution and patience is in order.

Subsequent "Worst Six Months" — which is May-October — have averaged losses with only two decent years 1982 and 2009.

The market bottom in August 1982 marked the end of the 1966-1982 secular bear market and came of the early 1980s double dip recession. Following the first back-to-back down Best Six Months since 1973-1974, the market hit a secular bear market low in March 2009. Market action in the rest of these years was rather grim.

The market bottom in August 1982

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