Market Insider

That Bear Market Move Might Have Just Been a Little Cub

The bear market that stalked stocks into early October may just have been a cub, and that could mean the market is in for more months of gains.

Andy Rouse | Getty Images

"If you believe what we experienced was a bottom at the 1099 level, and that it was therefore a near miss or a "baby bear" market, depending on closing or intraday prices, then history suggests but does not guarantee that we could have a pretty nice move over the next 12 months," said Sam Stovall, chief equity strategist at S&P Capital IQ.

On a closing basis, the S&P 500'srecent decline was 19.4 percent from its April high to the Oct. 3 closing low of 1099, but on an intraday basis it fell more than 20 percent when it hit 1074 on Oct. 4. The index, as of last week, had regained 17 percent on a closing basis and 20 percent on an intraday basis.

Since 1945, there have been four "severe" corrections in the 15 to 20 percent range, and four baby bear markets—declines of 20 to 25 percent.

Stovall said the historic average of gains following these "baby bear" markets have been an average 13 percent gain in the first three months, 23 percent in the six months and 32 percent in the year after.

"When I think that the market advanced as decidedly as it did, then I believe there's a very good chance the low has been established. Am I feeling optimistic? I still realize there's are an awful lot of lingering problems in Europe that I don't think are going to get resolved any time soon," said Stovall.

Stovall said there are other signs the market may be tilting upward instead of downward. He notes that according to a rolling chart of 50-day intra day price volatility for the S&P 500, volatility historically peaks within one month of the end of the decline. This time, he says, it peaked on Oct. 10, above the two standard deviations line and is now moving lower.

"The best performers on a price basis are technology and consumer discretionary, with both averaging a 30 percent advance in the first six months, since the late 1970s," he said.

Stovall, in a note, says that since WWII, it has taken the S&P an average of four months, and a median of two months, to get back to breakeven after a correction, which would make the estimated time of recovery somewhere between the end of November and the end of January. A full recovery from the summer sell off would be 24 percent.

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