Despite the recent fix, and regardless of which popular metric you use; PE, Shiller’s CAPE Index or Buffett’s Market vs. GDP; this is one of the most expensive markets since 1923. The other two were the 1929 and 2000 markets and we know how they turned out. By the way, 1923 was the year the “Composite Index” was introduced, the forerunner of the S&P 500.

The record shows that while stock prices may continue at elevated levels for a long time, they eventually revert to the mean. That can happen in one of two ways. Either the market goes sideways for a long time until gains pick up, or there is a sharp drop to bring prices in line with historical PE indices, a mean reversion. History has shown that investors are not a patient group. They will put up with a sideways market for a while, but eventually they will tire of the meager returns and put their money to work where they believe it will generate the most profit potential. Once the ball gets rolling, the market exits en masse and a severe bear market takes hold. The result: a big market crash is coming.

The question is when and if this past correction was a setback or a prelude to the big crash. A study of major bear markets indicates that the latter is more likely. In fact, a review of market declines of more than 28 percent since 1923 reveals that there is always a lead up to every major bear market. Some people are under the mistaken impression that stock market crashes occur at market highs. That is far from the truth.

The stock market may well be fickle, but providence is kind. It always gives us advance notice of a crash ahead, grabbing our attention in the midst of our complacency with a surprise crash and giving us a chance to get out before it crashes in earnest. This is shown in the analysis below for each of the following major bear markets (28% decline or more): 2007, 2000, 1987, 1973, 1968, 1962, 1946, 1937, and 1929. Intraday Prices and Closings Daily closes are only available for the S&P 500 starting in 1950. Therefore, the Dow Jones Industrial Average closes were used for markets before that.

2007
The initial market high of 2007 came on July 17 when the S&P 500 hit an intraday high of 1,555.90. The index would fall next week and finally settle at an intraday low of 1370.60 a month later on August 16, a drop of 11.9%. From now on, all highs and lows are intraday unless otherwise noted. The market would rally for seven weeks to hit a market high for the index of 1,576.09 on October 11, 2007, up 1.3% from its previous high. An initial drop of 5.5% was followed by a quick recovery to 1,552.76 on October 31, before succumbing and falling 10.8% to a low of 1,406.10 on November 26, 2007. it would recover to a high of 1523.57 and continue in a series of lows and highs until its low point of 666.79 on March 9, 2009 for a fall of 57.7%.

2000
The 2000 market gave plenty of warnings before the Dot.com crash. The market wobbled just after opening the New Year on January 3. After hitting a high of 1,478, the S&P 500 fell to 1,455.22 at close. It fell below 1400 the next three days and recovered to 1465.71, the high on Jan 20, 2000. From there, it went on a rollercoaster ride to the low of 1329.15 on Feb 25, a drop of 10 .1% from its maximum so far. The market finally peaked at 1,552.87 on March 24, 2000. It would fall precipitously on April 14 to a low of 1,339.40, a 13.7% drop, but then slowly rallied to 1,530.09 on 1 September 2000, only 1.5% below its all-time high. Thereafter it went down steadily with some steep dips followed by rallies, but only to the downtrend line. The market bottomed out at 775.80 on October 9, 2002 for a 50.1% drop.

1987
The bear market of 1987 was fast. After faltering to a high of 337.89 on August 25, 1987, the S&P 500 fell to 308.58 on September 8, an 8.7% hit. It quickly recovered to 328.94 on October 2, just 2.6% below its high. It wobbled to a close below 300 on October 15 before crashing the following Monday to close at 224.84, a 20.5% loss for that day. It would close lower on December 4, 1987 at 223.92, but the lowest point of the move came the day after the crash, on October 20, when it fell to 216.46 for a 36.0% loss from the August maximum.

1973
This, along with the 1968 bear market, formed part of the mega bear market that ran from 1967 to 1982. The S&P hovered within the 100 and 110 range for most of the year. It broke above the 110 barrier in late summer only to dip below it again before making its final rise at the close of the year. It peaked at 119.79 on December 12, 1972 and then fell 4.3% to 114.63 on December 21, 1972. New Year’s drove the index higher reaching a high of 121.74 on December 11. January 1973, a gain of 1.6% from the previous high. It quickly fell to 111.85 on February 8 and then proceeded to fall sharply through a series of bumps until bottoming out at 60.96 on October 4, 1974, a loss of 49.9%.

1968
After an initial dip to start the year, the market rose steadily from March through November, finally topping out on December 2, 1968 when the S&P 500 peaked at 109.37. The index fell to 96.63 on January 13, 1969 (an 11.6% drop), faded on its rally to within 0.43 points of the March 17 low, and then rose to 106.74 on January 14. May 1969. After reaching the top 2.4% it succumbed finally hitting the bottom on May 26, 1970 at 68.61. That was a 37.3% haircut.

1962
The stock market rose steadily from October 1960 to December 1962 when the S&P 500 peaked at 72.64 on December 12, 1962. It then fell to 67.55 on January 24, 1963 with a loss of 7, 0%. The index quickly returned to 70 the following week and made a small gain the following month, finally reaching a high of 71.44 on March 15, 1.7% below the high. Thereafter, the index plunged to 51.35 on June 25, 1962 for a 29.3% drop.

1946
The market had been on the rise since the latter part of World War II and began 1946 in the same fashion gaining 8% in February. The intraday highs and lows of the S&P 500 were not available for analysis, so the closes of the Dow Jones Industrial Average will be used going forward. The Dow Jones closed at 206.61 on February 5, 1946. The index then plunged 10% to close at 186.02 on February 26. It quickly recaptured its previous high and topped it at full speed to 212.5 on May 29, 1946, a gain of 2.9%. from its previous high. The bumpy ride continued through August, when the index hit 204.52 on August 13 and then fell exhausted, finally closing at 163.13 on October 9, 1946 for a 23.2% drop. Despite several rally attempts, the market would continue to struggle until February 1948 with a maximum loss of 28%.

1937
After a precipitous decline from 1929 to 1932, the market appeared to be in recovery mode until it leveled off in early 1937. The Dow Jones closed at 194.4 on March 10, 1937 to mark the end of the uptrend. The index then declined for three months until bottoming out on June 14, 1937 at 165.51 for a loss of 14.9%. It spent the next two months on a steady climb, finally reaching 189.34 on August 16, 2.6% below the previous high. That was his last hurray as the market plunged 49.1% to its close of 98.95 on the March 31, 1938 Dow Jones.

1929
Like the 2000 market, the ’29 Big Crash gave plenty of warnings. After going sideways for the first half of the year, the market went through a 10.0% correction as it went from a Dow Jones close of 326.16 on May 6 to 293.42 on May 27. Thereafter, it rallied steadily until reaching the market’s close high of 381.17 on September 3. , 1929. It fell lower, slowly at first, but then gained momentum until reaching a low point on Friday, October 4, with the Dow Jones closing at 325.17, a loss of 14.7%. It tried hard to rally the following week, but was only able to close at 352.86 on October 10. At 7.4% below the high, this was the lowest September percentage close to a previous high of any of the major bear markets. Then again, this was the granddaddy of all bears. Ten trading days later, on October 24, the index closed below 300. It broke out on Monday, October 28, and closed again the next day at 230.07. The market continued its nosedive until it finally bottomed out on July 8, 1932, when the Dow Jones closed at 41.22 for a record drop of 89.2%.

Conclusion

Historical data shows that every major bear market since 1923 has always provided investors with a warning. After apparently peaking, they experienced a significant decline before rising again only to plummet thereafter. In two instances, 2000 and 1929, he gave two warnings; the first a correction months before the peak and the second after the peak.

Declines after the initial peak ranged from 14.9% to 4.3% with a mean of 10.8% and a median of 11.6%. In three of the nine cases, 2007, 1973, and 1946, the second peak was lower than the first. The range was from a loss of 7.4% to a gain of 2.9% with an average of -1.4% median of -1.7%. Taking out the outlier of 1929, 7.4%, the average was -0.63% and the median -1.6%. The time between the two peaks ranged from 30 days to 5.4 months with a mean of 96.7 days and a median of 93 days.

Starting from the premise that we are in the early stages of a big bear market and having gone through a 10% correction, what are we in for? Examining the data, it turns out that we are in the mean. There seemed to be no relationship between the severity of the bear market and the length of time between the two peaks. However, five out of six times the market went through a bona fide correction of 10% or more, it took months for the market, anywhere from 2.9 to 5.4 months, to top out and begin its slide in earnest. . The notable exception was the 1929 Crash, which only took 37 days between the first and second peaks. Although there was no consistent pattern for the depth of the initial decline and the total decline, it is notable that the four largest initial declines resulted in declines of 49% or more, a level only reached in the 1973 bear market after a decline of only 4.3%. . There is no discernible relationship between the initial decline and the second peak, nor the total decline and the second peak.

It could be that Morgan Stanley’s prediction on Monday that a slowdown from the second quarter is on the horizon is correct. We are already above the -7.4% level of 1929, so it appears that this market does not correlate as well with that one, and the wait until the next decisive peak will be measured in months. Regardless, I advise everyone to watch the market advance very carefully. If the S&P 500 is within 2.6% of the January 26 high of 2,872.87, or 2,798, that is your signal to exit the stock market. There is no point in being greedy about the last 1 or 2 percent gains and risk losing much more.