Grist for the Bears
Doug Short has attracted enormous attention to his website http://www.dshort.com/ with his “Four Bad Bear Market Analysis” (shown below and updated to Friday 28 August by its originator). The natural bears took great satisfaction from the apparently severe regularity of past bear markets, especially that of the crash of 1929. The problem for the bear lovers, as may be seen in the accompanying diagrams is that the relationship, especially with the bad bear of 1929-32, appears to have broken down in the face of the rally in stock markets that began in March 2009. The recent recovery appears by now to have extended for too long and too far to be identified as a bear market rally or a bear trap.
Source: dshort.com
If at first you don’t succeed….
This break in the data led the inventive Doug Short (his real name assuredly) to realign the starting point for the analysis and the apparent regularities from the top of the markets before they collapsed to the following bottom, when the markets began their recovery. This new version of the analysis provided by Mr Short that demonstrates that the bottom after the crash of 1929 “failed” eleven months later, no doubt provided renewed comfort to the bears. However as may also be seen the recent rally has also by now taken the Dow beyond its gains of 1929. A new attempt to find regularities in the stock market patterns may (bulls hope) soon be called for.
Source: dshort.com
Bull and bear markets are only revealed with hindsight
The reality is that bear and bull markets are only identified after the event. Daily share market movements are a random walk and recent events prove no exception to this as we show below. A bear market is one when the random drift proves, well after the events, to have been generally lower and a bull market is identified after the event as a period of time when the drift was mostly higher.
In the figure below we show the pattern of daily percentage movements in the S&P 500 and the JSE All Share Indexes since the lows in the market on 9 March 2009 until the market close of Friday 28 August 2009. In the further figure we show the distribution of these daily moves about its daily average of a positive 0.02% per day with a large standard deviation of as much as 1.6% per day. The equivalent statistics for the S&P 500 are an average move of .03% per day with an even larger standard deviation of 1.7% per day. If we take the period back to the peak of the markets in May 2008 the average daily price move for the S&P 500 since then is a negative .09% per day and -0.06% per day for the JSE.
Daily percentage moves in the S&P 500 and the JSE ALSI since 9 March 2009
Source: I-net Bridge and Investec Private Client Securities
Histogram and Descriptive statistics for daily moves in the JSE ALSI March-August 2009
Source: I-net Bridge and Investec Private Client Securities
Beating the market demands careful judgment about the forces that will drive and surprise the markets
Predicting whether the continuous random drift in market indexes and share prices will be higher or lower calls for fundamental judgments about the information flows that will move the market over the following twelve or more months. The past provides us with our theories about the forces that drive markets – our theories then lead us to anticipate and predict the direction of the economic fundamentals that we believe will surprise market participants and lead the market to drift higher or lower in the course of the next twelve months or so. We have to make these predictions with humility about the difficult nature of the task of beating the well informed market.
Mining past moves in stock market indices for patterns that will repeat themselves in the future is often attempted, but in our judgment such attempts are unlikely to prove reliable in a consistent way.