Wednesday, December 9, 2015

Correction Through Time?

The S&P 500 closed at 2,059.82 on December 9th, 2014.  One year later, the index sits almost exactly at that same level and has done nothing but frustrate investors over the course of the last 12-months.  Unless you were fortunate enough to hold a select few stocks that have outperformed over that time, you've likely spent the year fighting to just tread water.

With the market's sideways behavior in mind, we've often asked the question of if we're looking at a correction by way of time instead of price.  While the market did indeed have a 12% pullback in August-September, it has not come close to the classic 20% correction that typically signifies a "bear" market and end of a current "bull."

This line of thinking, and it's in no way original to us, supposes that the 12-months of sideways consolidation could be just a pause that ultimately allows the market to propel much higher and we continue on in this secular bull trend.

We'd counter that there are plenty of reasons to be bearish here.  There's no shortage of fundamental, technical, or quantitative data available to back up a narrative of potential weakness.  However, if you take out all of the "noise" and just look at price and trends, they tell an interesting story.  The most important area to focus on will be 2,134 which would make new highs in the S&P.  If that area can be breached to the upside, the current choppy action will be remembered as a pause in an overall bull market.

Further, a few quick things our research found:
  • Going back to 1920 the average bear market lasts 12.43 months. 
  • Current sideways consolidation is approaching 12 months (Does this count for anything? Are we getting our correction through time instead of price?).
  • Average bull market lasts 28.50 months.
  • This consolidation comes after a 2 year run straight up from late 2012.  Looks somewhat similar to the 2011 market "pause."

Doug Short has a nice recap on the history of secular bulls and bears and his data suggests that we're in for more "up" if we are indeed in a secular bull.  On average, the secular bull phases of the market have gained far more than the current move off the 2009 bottom (inflation adjusted).

Secular Trends

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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