And The Pendulum Swings

December 24th, 2018: Dow ends down 651.27 “Worse Christmas Eve In History”

December 26th, 2018: Dow ends up 1,086.25 “Biggest Single-Day Point Gain In History”

What a difference a day off can make! Or maybe not…

I’m an optimistic person—maybe too optimistic at times.  But, I’ve learned from experience and from wiser people to be a little more skeptical at times. Today is one of those days; as much as I’d love for the bear market of late 2018 to be over, I don’t think we get off that easily. 

Sorry to kill today’s vibe.

The trade war with China hasn’t ended. The partial government shutdown still lingers. The President still isn’t fond of Fed. Chairman Powell or his decision to raise interest rates. Nothing really has changed from December 24th, other than Santa Claus visited everyone’s house. Yet, the market had its best day in terms of points in history (yes, I know there are better indexes to quote than the Dow, but it will be the one that gets the most coverage).

Hopefully, today was the beginning of the Santa Claus rally everyone has been looking for, but just in case it isn’t, let’s take a moment to examine what today might have been—a bear market bounce. It’s not uncommon to see big up days in the midst of a bear market; in fact, some of the biggest single-day point moves have occurred in bear markets.

In case this isn’t the end of the current downtrend, let’s take a moment to learn a little more about why days like today may not be over and why they do not usually signal the beginning of a new uptrend. Rather than attempt to do the research myself, I’m going to call on a couple of great pieces written by others.

1. Meb Faber: Where The Black Swans Hide and The Ten Best Days Myths “What about the outliers — where do they occur? The vast majority, roughly 60-80%, of the best and worst days occur after the market has already started declining. The simple reason is that markets are more volatile when they are declining, and when the really volatile events and days occur they tend to cluster together. “

2. Resolve Asset Management: Using Time-Series Momentum To Intentionally Miss The Best Days. Yes, Really “In fact, investors would be considerably better off missing both the best and worst days or months in the market.”

If today is, in fact, a big up day in the middle of a bear market, that is ok. Bear markets are not something investors should fear—that doesn’t mean investors have to enjoy them either. Understanding the characteristics of different markets, for example, big up days in a bear market, can help investors keep their emotions in line and hopefully prevent misguided investment decisions.

A Plug For A Financial Plan

If gaining a better understanding of the characteristics of a bear market is not enough to keep you from making a regrettable investment decision, then lean on a financial plan. Knowing why you are investing, why your portfolio is allocated the way it is, and having a trusted advisor to reassure you of your strategy can provide just enough confidence to hang on, regardless of which direction the pendulum swings. 

Investors should avoid getting too high (today) or too low (Monday) when it comes to the markets. I hope you take a few moments and read the links above, gain a better understanding of what tends to happen in bear markets, revisit your financial plan, and stay focused.

Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining to your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimers page.

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