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DNA of the Epic high for a stock market discovered

The biggest problem caused by an epic crash is the PERMANENT change for investor psychology which occurs due to the period for a market or index to climb back above the epic high being extended.  The stock market is pavlovian. Prior to the epic high and the inevitable crash which follows investors get used to the quick recoveries after the crashes from record highs.   Investors learn to buy the dips.  With each quick recovery they become more comfortable and less cautious.  

The chart below depicts the two record highs and their minimum 10% corrections which occurred prior to the March 2000 epic high.  The July 1998 record high corrected by 19.3%.  The S&P 500 was able to climb back to a new high 90 days after it reached bottom.  The July 1999 record high’s post-crash behavior was virtually identical to 1998.  The one year later record high corrected by 12.6% and the S&P 500 was able to climb back to a new high 87 days after it reached bottom.

Note.  For the above chart the recovery periods after the correction lows occurred were 90 and 87 days from high to high.

The chart below depicts that the pavlovian conditioned traders who bought the April 2000 dip had significant losses.  Instead of exceeding the March 2000 high, within 90 days after the 11.2% correction the S&P 500 trended down and to a decline of 49% from its March 2000 high to its October 2002 low.

The chart below depicts a similar pavlovian conditioning for the two 2018 record highs which were followed by double-digit corrections prior to the December 2020 epic high.  The January 2018 record high corrected by 10.1%.  The S&P 500 was able to climb back to a new high 143 days after it reached bottom.  The S&P 500 corrected by 19.3% from its October 2018 record high and then climbed back to the high within 147 days.  Finally, the index after reaching its January 2020 record high corrected by 34% and then climbed back to the high within 127 days.

Note.  For the above chart the recovery periods after the correction lows occurred were between 127 and 147 days from high to high.

The 1929 epic high was preceded by only one double-digit correction from a record high.  The chart below depicts that the S&P 500, after reaching a record high in May of 1928, corrected by 10.2%.  The S&P 500 was then able to climb back to its high by August of 1928 which was 61 days after the index had bottomed.  The S&P 500 then advanced to its September 1929 epic high.  The index then declined by 10% in early October 1929.  Instead of climbing back to its high within 61 days as it did in 1928 the S&P 500 declined by an additional 34% by November 1929.

In summary, the S&P 500 was unable to quickly recover from the 10% corrections which occurred after it reached epic highs.  The timespan for the S&P 500 to reach new highs ranged from 13 years after it reached its 2000 epic high and 25 years after its 1929 epic high.