Dow Jones 300+ Point Moves and Bear Markets

Merrill Lynch's David Rosenberg was on CNBC this morning arguing that yesterday's 300+ point move was simply a bear market rally, and that 300+ point moves usually occur during bear markets.  He then went on to say that during the entire bull market from 2002-2007, there was not one single 300 point rally.  While 300 point rallies usually occur during bear markets, they have also occurred at the start of major rallies.  In fact, the Dow rallied 5.56%, 13.1% and 12.5% following the first three ever 300+ point moves in the Dow in '97 and '98.  They also occurred multiple times at both the July '02 and October '02 lows.  In fact, Rosenberg's argument that there were no 300+ point rallies during the last bull market was simply incorrect.  The Dow actually had two 300+ point days on 10/11/02 and 10/15/02, both of which came during the first week of the bull market.

Overall, the average return in the three months following all 300+ point moves has been 0.06%, with positive returns 50% of the time.  Not exactly bullish, but not bearish either.  Instead of arguing that 300+ point moves only come during bear markets, it should have been that they usually come during bear markets, but they can also come right at the turning point from a bear to a new bull.

Comments

[Jody Wilson]

Three months is not a sufficient amount of time to judge the market's health after a 300+ point gain. Bear market rallies usually last at least that long. It would be more instructive to show the 6-month or 1-year returns after each 300+ day.

[Chuck]

I think you guys are wrong. You seem top be ignoring the rapidly increasing spreads and the declines now being witnessed in the retail sectors. consumer spending IS slowing and global growth is declining.

Bear Market Rally.. don't get trapped

[Damian]

"The Dow actually had two 300+ point days on 10/11/02 and 10/15/02, both of which came during the first week of the bull market."

Uh, go back and look at your charts - October 2002 was still in the bear market. Bull market doesn't start till 2003.

[Barry Ritholtz]

Hi Guys,

I think Rosenberg was pushing back against the "300 point rally? Its a bull market!" meme circulating around. Note that he has 15,000 retail brokers, and when that line circulates on Bubble TV, he gets tons of internal email on it.

Consider: On October 11, 2002, the S&P500 stood at 835. Six months later, on March 07 2003, it was 829. That's a good reason why many people mark the end of the Bear market as March 2003.

Buying the 1997 and 1998 300+ days made you money (if you held on long enough). But your chart appears to show that every subsequent 300+ day led to a lower low.

Question for the Bespoke boys:

• What percentage of 300 point days had lower prices occur there after?
• What was the 300 point day to trough average percentage loss?
• How many days afterwards did the trough/low occur on average?

Cheers

BR

[Bullion]

Sugestion:

Is it possible for you to analise 3%+ up days in the S&P 500 instead of 300+ days in the DOW?

[Justin]

Damian,

Looking at the chart in the post, the lows were reached in October 2002. It is standard across the Street that October 9th, 2002 was the start of the bull market that ran from 10/9/02 to 10/9/07. Exactly 5 years long.

[Justin]

Hey Barry,

Thanks for the comment. There's no doubt that most 300+ point moves come during volatile times usually when the market is headed lower. The majority came during the '00-'02 bear and we've now had 6 in this bear market. There is no way to argue that a bottom has been reached because of the recent 300+ point move, but the only thing we took issue with was the fact that Rosenberg argued that they always come during bear markets. We hear you on your point that he was pushing back against the rally crowd, though.

While most come during bear markets, some of them do mark major turning points when the market starts heading higher. The ultimate bottom in this market will probably be met with a few days of 300+ point gains, but we won't know until the new bull has been confirmed. Was Tuesday's 300+ point gain the bottom? The odds are against it for numerous reasons, but it can't be ruled out like Rosenberg did.

Justin

[Damian]

"It is standard across the Street that October 9th, 2002 was the start of the bull market that ran from 10/9/02 to 10/9/07. Exactly 5 years long."

We clearly have different definitions. I'm marking the beginning of the Bull market (March 03), you're marking the low of the market.