Four Percent Plus Declines in the S&P 500 Since 2000: New Update

August 18th, 2011

by Doug Short

This was an update I was hoping to avoid.

We've now had four 4% plus declines in the S&P 500 over the last eleven sessions. Is this a sign of capitulation selling near a market bottom or the early phase of a prolonged wave of high volatility with more downside to come?

Unfortunately, there's no crystal ball function in Excel, so let's take a more pedestrian approach to investigating the question. Here is a companion chart to my frequently updated S&P 500 snapshot of performance since the 2007 high. In this version I've highlighted all the days with a 4% or greater decline.

As we readily see, these sharp daily tumbles happened almost exclusively in the bear market declines. A total of 20 such days occurred between the October 2007 peak and the March 2009 low. We've now experienced four such declines, the worst being the 6.66% selloff on Monday a week ago (August 8th). That 6.66% doosey was followed the next day by a 4.74% gain — only to be erased the next day by a 4.42% loss.

Let's take a longer look back. Many of my readers were active in the market during the Tech Bubble and subsequent bust. But during the queasy months of the Tech Crash, there were only four 4% plus declines — and none in the rally from the 2002 low to the 2007 all-time nominal high.

At least since the onset of the 21st Century, daily losses in excess of 4% happen in cyclical bear market declines. The one outlier during this time frame was the 4.28% decline on April 20 2009, about six weeks after the 2009 low. Let's hope we stop at four such declines during this correction. The twenty four-plus losses during the 2008 Financial Crisis, from the first to the last, took the index from 1251.70 to 816.21 — a decline of 435 points in 56 business days, about 11.5 weeks. A 2011 meltdown of comparable length would take us to mid-October, the month that has most often hosted market bottoms.

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