Green Days And Green Weeks Common During Downtrends

If we were having dinner with a friend while the markets were closed, it would be easy to say, “yeah that makes sense” in response to the following statement:

During a bullish trend, stocks do not go up every day. During a bearish trend, stocks do not go down every day.

However, when the markets are open and a countertrend rally comes, it is very difficult to remember the common sense statements above, since emotions and egos like to take over.

What Can We Learn From History?

The table below shows the largest 40 daily gains in the S&P 500 during the dot-com bear market. It tells us big up days are very, very common within the context of an established downtrend.

Given the magnitude and frequency of the gains in the table above, you may find it difficult to believe that during the same period the S&P 500 lost 49% (see chart below).

How Do The Trends Look In 2016?

The charts shown in this week's video help us better understand the context of recent green days in the stock market. The charts speak for themselves.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

How About The Financial Crisis?

The results paint a very similar picture. It was not easy to navigate the 2007-2009 bear market in terms of holding defensive assets during the big up days and countertrend moves. Markets never make anything easy on anyone (bulls or bears).

During both bear markets, the primary trend drove the outcome, rather than the countertrend green days shown above. Despite the top 40 daily green days, the S&P 500 lost over 56% between October 2007 and March 2009 (see chart below).

It Is Not Just One-Day Wonders Either

If you want to be right during a downtrend, you are going to have to be willing to be wrong on about 50% of the days during that downtrend. What can we learn from a green day during a downtrend?