By Mark Haines
Special to The Street
Jim Cramer's call of a bottom may turn out to be on the money after all. What had me doubtful was the Fed raising rates into a Dow that had gotten too far ahead of itself (based on relationship to 200-day moving average, my favorite risk indicator). In the 13 rate-hike cycles we've had since WW2 (pronounced Dub-yah, Dub-yah Too, or "The Big One"), the following results occurred within six months of the first rate hike:
three bull markets roared on uninterrupted, but all three were back in the '60s
three bear markets were triggered, the most infamous being the '73-'74 gut-wrencher
seven sideways markets ensued, up or down about 5%.
At first blush, this one looked like '73-'74 again ¿ a top, then a rate hike about a month later, into a narrow-breadth market.
However, Tuesday's little frolic sheds new light on things. I went through my database and looked at all post-WW2 days when the Dow was up 2.5% or more.
Some stage-setting facts: Since Jan. 1, 1946, there have been 13,118 trading days. There have been 10 bear markets. (I'm counting one where the Dow actually lost only 19.5%.) Those bear markets ranged from 38 days long (1987) to 481 days long (1973-74), for a total of 2,023 days. So, the market has been in bear mode on only 15% of the days since Jan. 1, 1946.
Since Jan. 1, 1946, there have been 82 days before last Tuesday on which the Dow gained 2.5% or more. Twenty-five of them occurred in bear markets, 57 in bull markets. This demonstrates that such days are statistically more likely to occur in bear markets than in bull markets, strange as that may seem. Thirty percent of the big up days occurred in the 15% of the time that the market was in bear mode. The 85% of the time that the market has spent in bull mode saw only 70% of the big up days.
To put it another way, a random distribution of the 82 big up days would have been 85% of them, or 70, in bull markets, and 15% of them, or only 12, in bear markets.
And, when one looks at where, within a bear market, the up days have erupted, the pattern is interesting. Of the 25 big up days that occurred in bear markets, only two came early in a bear move. Now, if we are in a bear move, we are early in one, because we are only about 5% down from the high.
But, since early bear moves are rarely visited by such snap-back days, it indicates that this is NOT an early bear market. The overwhelming majority, 23 of the +2.5%-or-more days that came in bear markets, came after the bear had become well-established, or as the bear was expiring.
The 57 that occurred in bull markets also show an interesting pattern. NONE . . . not a single one in 50+ years . . . occurred LATE in a bull run. Out of 57 such days, 41 came early in a bull move, 16 came in the middle. Also worth noting, five of the 57 came in the middle of corrections . . . a sort of head fake indicating the correction was over, which turned out to be premature. But, ALL of them came at times when there was still plenty more upside to come.
So, if history is the guide, what we have here is either an unusual beginning to a bear market or a garden variety correction in a bull that is still on all four legs.
One other pattern emerged from the data. Many of the 82 big up days came in clusters of two or more. That is, within no more than one calendar month of each other, and sometimes within just a few days of each other. I counted 16 such clusters. Fifteen of the 16 clusters occurred either a) late in a bear market, b) early in a bull market or c) midway through a bull market. In short, 15 of the 16 were excellent signals that downside risk was minimal. So, if we get another +2.5% or more up day on the Dow within a month, the historical pattern suggests there is very little downside risk.
Of course, if this bull market has proven anything, it is that old guidelines don't always apply to it. Sorry, been around long enough to know that every once in a while the 15-1 shot does win the race.
Mark Haines is the host of