The Bottom, Or Not The Bottom

Hello Scoopers,

It is a new week but we have an age-old question: Have we hit the bottom of the correction?

In today’s edition of the Daily Scoop, we turn our attention to the above question and share with you the result of our weekend analyses. As stock market nerds we couldn’t help but number crunching over the weekend. We used a 50-year history of the stock market and took a look at the history of stock market crashes looking for answers.

The question of whether we hit the bottom or not becomes even more important as the Fed cuts the interest rate to zero and announces a new stimulus package on Sunday. However, the Futures’ market took the news as another sign of economic weakness and the market’s trading hit a 5% “down limit” on Sunday evening. So, are we at the bottom or not? — more on that in the “Overall Market” section.

But first, here is a recap of what happened in the market on Friday:

Market Recap

  • U.S. markets: Friday turned out to be an all-around green day in the stock market as all three indices recouped some of the losses they took earlier in the week. Scroll down to the “Overall Market” section to read more.
  • Cryptocurrency: Bitcoin’s price is in the $5,000 range. Apparently, last week’s decline in Bitcoin’s price is the largest sell-off in the cryptocurrency’s history.

 

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Have We Hit The Bottom Of The Stock Market Correction?

What does history say?

As of Sunday, March 15th, 2020, the year-to-date return of the Nasdaq index on the NASDAQ Composite (^IXIC) is -12.23%. Its one-month gain is -19.08%. The one-month time frame roughly mirrors the heightened mass awareness around the severe impact of the Covid-19 pandemic on the global economy. Had we written this Scoop three days earlier, the effect would have been more than a 20% drop, which is the widely accepted definition of a correction. It’s only fair to ask, have we reached the bottom?

When last Thursday the market hit the 20% drop milestone, algorithms and investors alike rushed to buy stocks on Friday. We must confess that we did it too (See our Covid-19 Portfolio). It was as if the stock market would respect our definitions of a market correction. Just because we hit a 20% decline threshold doesn’t mean we hit bottom.

What Does History Say?

To answer that question, this weekend, we looked at the daily 1-Day, 10-Day, Month-To-Date, Quarter-To-Date, and Year-To-Date return of the NASDAQ Composite (^IXIC) since 1970 (50 years of history). We were interested to find the number of occasions with a 20% decline that was followed by another consecutive day of decline. In other words, we wanted to see how many occasions a market continued to fall after it hit a market correction.

Before we share the results, let’s hear from our sponsors.

 


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The History Of NASDAQ’s Correction

First, let’s take a look at the number of occasions with 20% or more decline in the last 50-year history of the NASDAQ index:

  • 1-Day Return: none (0%)
  • 10-Day Return: 23 times (0.2%)
  • Month-To-Date: 37 times (0.3%)
  • Quarter-To-Date: 282 times (2.2%)
  • Year-To-Date: 614 times (4.8%)

To better digest the above information, in the last 50 years, there has never been a day when the NASDAQ index declined more than 20%. Knowing that fact is comforting but not surprising. The definition of a market correction is not limited to a one-day return. It refers to any 20% decline from the last record-high level. The better number to rely on and take some solace in is that only about 5% of days in the last 50 years, we had to deal with a 20% Year-To-Date decline in the NASDAQ index. As much as this information is comforting, it doesn’t say much about whether we have hit the Covid-19 bottom. We need to look at the stock market return in the days following any 20% decline. To answer that question, we looked at two scenarios.

 

Scenario One

Whether any 20% or more decline in the 10-day return of the NASDAQ index was followed by another negative day? The answer is that on 13 occasions (0.1%) in the last 50 years, such a phenomenon has occurred.

 

Scenario Two

Whether any 20% or more decline in the Month-To-Date return of the NASDAQ was followed by another negative day?

The answer is that on 17 occasions (0.13%) in the last 50 years, such a phenomenon has occurred.

Final Takeaway

The key learning of the study is that historically speaking, it is possible that we haven’t yet hit the bottom of the current market correction while it has a low historical likelihood.

Knowing that results, what would a savvy investor do?

Assuming we all agree that the job of a savvy investor is to think in a probabilistic way, there is a low probability that the stock market keeps going down significantly from here. Of course, there is always a possibility that the stock market keeps declining as it was evident in a few handfuls of occasions in the last half a century history of the NASDAQ index. Probabilistically speaking, it’s time to start investing. And, again, probabilistically speaking, it’s prudent not to jump all in.

Have a watchlist of well-managed companies with strong revenue, profit, and free cash flow, and nibble slowly. Don’t run out of cash and don’t be phased out by the further decline in the stock market. That’s what we plan to do. You’d need to consider your own priorities and financial status before deciding on your actions moving forward.

 

That’s a wrap on this deep-dive weekend analysis. Let us know whether you enjoyed this analysis or was it too nerdy. Would you like to read similar analyses in the future, or you’d rather other formats. Our email address is members@tradestocks.com.

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