Bear Markets will have Large Up-Days Too

Bear Markets will have Large Up-Days Too

Posted on May 31, 2022
This week’s market update will be a short one. We want to follow up on a few quotes from lasts weeks update.  As a side note, if you have not seen that update, it features a video that Canterbury produced on the current state of the markets, the conservative investor’s struggles, and how the Portfolio Thermostat has dealt with this difficult market environment.  You can find that update here.

Here is the first quote from last week’s update:

“The market index, the S&P 500, fell for the 7th consecutive week.  The last time the index rose for the week was the last week of March.”

That streak came to an end last week.  For the first time since March, the S&P 500 finished higher for the week, rising 6.58%.  What does this mean for the markets?  Here is another quote from last week’s update:

“What does that mean? Well, not too much.  There isn’t anything special about a week’s end, month’s end, or year’s end.  Remember, markets do not understand the calendar.”

The market’s rise of nearly 7% in a single week (5 trading days) featured three outlier days.  Outlier days have been a consistent characteristic of the markets this year.  This is what we wrote about outlier days last week:

“What has been concerning is the number of outlier days.  We have outlier days in just about every one of our market updates.  We, at Canterbury, define an outlier day as any trading day beyond +/-1.50%.  Outlier days, particularly in clusters are a characteristic of high volatility.  High volatility is a bear market characteristic.  After Tuesday, we will be one hundred days into 2022.  Thirty-four of those days have been outliers.  That is nearly double the number of outlier days that occurred in all of 2021.”

Thirty-six days (out of one hundred and two) have been outliers in 2022.  That is an outlier day occurring once every three trading days, which is almost two outliers per week.  Last week featured three outlier days.  Outlier days, particularly in clusters and regardless of direction (up or down) are not a bull market characteristic.  They are a sign of market inefficiency, and market inefficiency means high volatility—which is the primary characteristic of a bear market.

Bottom Line

Bear markets will feature large rallies, in a short period of time.  These rallies do not lower the market’s volatility and can often precede further declines.  Bear markets are filled with lower highs and lower lows.  So far this year, that is exactly what has been experienced- a series of lower highs and lower lows.

Our good friend and market technician, David Vomund wrote this week:

“A guest on Fox Business said that an index of active managers shows they have just a 19% exposure to stocks. It feels terrible to be out of stocks when the market rises so no doubt these cash-heavy managers were panicked last week. Worse still is to sell at the bottom and then watch the market rise. You don’t want to be the last person to sell.”

In other words, the rally last week was caused more by panic than rational thought.  Heading into last week, the market was oversold, according to AIQ’s technical expert reading.  Now, after last week, the indicators show that the market is very overbought.  Does that mean that stocks will fall this week?  Not necessarily.  Bear markets are irrational.  Do not try and make a rational prediction based on an irrational environment. 

Canterbury will continue to monitor and adapt portfolios for any changes we begin to see in the market environment.
Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.