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Buying at the Bottom

With the big rallies of the past few days, many are wondering if we have hit a bottom. If history is any guide, the biggest returns come within the first few months of troughs. It's no wonder why so many traders try to spot the bottom.

Looking back at past recessions and market swings, a large percent of the major indices' first year gains come within the first 3 months of the bottom. For recessions over all, the Dow has put up on average 48% of its first year gains within 3 months of the recession ending and 73% within 6 months. The S&P 500 is even more extreme with 76% of its first year gains met within 3 months of the recession ending.

Of course, these are averages. The 2001 recession did not follow this pattern, but other recent recessions and major market swings did. Here are some examples:

2001 Recession:

  • Dow
    • Trough on 9/21/01
    • 1 year later, down 3%
    • 3 months later, up 22%
    • 6 months later, up 27%
  • S&P
    • Trough on 9/21/01
    • 1 year later, down 12%
    • 3 months later, up 19%
    • 6 months later, up 19%

1990-91 Recession:

  • Dow
    • Trough on 10/11/90
    • 1 year later, up 26%
    • 3 months later, up 6% or 22% of the full year's gains
    • 6 months later, up 23% or 88% of the full year's gains
  • S&P
    • Trough on 10/11/90
    • 1 year later, up 29%
    • 3 months later, up 7% or 23% of the full year's gains
    • 6 months later, up 28% or 95% of the full year's gains

1981-82 Recession:

  • Dow
    • Trough on 8/12/82
    • 1 year later, up 52%
    • 3 months later, up 34% or 65% of the full year's gains
    • 6 months later, up 40% or 77% of the full year's gains
  • S&P
    • Trough on 8/12/82
    • 1 year later, up 58%
    • 3 months later, up 36% or 62% of the full year's gains
    • 6 months later, up 44% or 76% of the full year's gains

Dow After Black Monday - 1987:

  • Trough on 12/3/87
  • 1 year later, up 18%
  • 3 months later, up 16% or 91% of the full year's gains
  • 6 months later, up 17% or 93% of the full year's gains

Dow After Long Term Capital Collapse - 1998:

  • Trough on 9/10/98
  • 1 year later, up 45%
  • 3 months later, up 16% or 36% of the full year's gains
  • 6 months later, up 28% or 63% of the full year's gains

So the debate goes on as to whether we are at a bottom. In the meantime, the tech sector has been amongst the the biggest winners in this recent rally with Broadcom, Unisys, NVIDIA, Qualcomm and JDS Uniphase up the most this week.

Symbol
Price
 
Change
%Change
DJIA
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S&P 500
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NVDA
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JDSU
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QCOM
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BRCM
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