![]() 20) one day before the market hit its bottom (Sep. ![]() Next consider the bear market that occurred in the wake of the 9-11 terrorist attacks, when the VIX hit its peak (Sep. So even if you were to count this as an example of the Federal government stopping a bear market in its tracks, it can’t explain why the bear market and the VIX both peaked on the same day (Aug. That’s when the Federal Reserve Bank of New York organized a bailout of LTCM in which the hedge fund’s biggest creditors extended $3.6 billion of credit. At most there was an implicit Federal government guarantee, but that didn’t materialize until several weeks after the VIX peaked and the bear market came to an end. In the case of the 1998 bear market, no public money was used to bail out Long Term Capital Management (LTCM). Try as I might, I can find no correlation between the length of this lead time and the speed and magnitude of the federal government’s response. I’m not so sure that’s the correct lesson. government’s extraordinary stimulus that it enacted in mid-March. Some of you have suggested that I draw another lesson: The reason the market bottomed out so soon after the VIX peaked was because of the U.S. Still, the investment implication is that we should focus on the weight of the evidence rather than just one indicator, no matter how compelling. This other analysis was equally plausible and just as solidly based on historical data. 7, based on the number of days between the end of the bear market’s first precipitous drop and its eventual end. For example, in that early-April column in which I suggested that the final bear market low could be June 14, based on the VIX, I presented another historical parallel that points to a final low on Aug. In my defense, I plead “nolo contendere.”Īnother lesson is that it’s never the case that the data all point to the same precise conclusion. ![]() It's knowin' so many things that ain't so.” This episode reminds me of a famous saying from Josh Billings, a 19th century humorist: “The trouble with most folks isn't their ignorance. Randomness (luck, in other words) plays a huge role in the market’s shorter-term gyrations, no matter how compelling an analysis might otherwise be. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited.I’m not holding my breath, and I’m sure you’re not either.Ĭan we learn any lessons from this experience? One is to be reminded - yet again - that financial markets are never 100% predictable. Mark Hulbert is a regular contributor to MarketWatch. The correlation coefficient between the relative strength ranking that then prevailed and the historical pattern stood at 0.43 the current reading is higher and so even more bearish. One time that it was accurate, for example, was in April 2015, when my column on this indicator ran under the headline “leading indicators signal a market top.” A bear market began one month later, according to the bear-market calendar maintained by Ned Davis Research. Needless to say, neither this (nor any indicator, for that matter) is guaranteed to work. This latest reading is one of the higher coefficients I’ve seen from my periodic monitoring of this indicator. Today, in contrast, it is a positive 0.67. In mid-May, this coefficient stood at a significantly negative minus 0.66. A coefficient of zero would mean that there is no detectable relationship. This statistic ranges from a high of 1.0 (which would mean that there is a perfect one-to-one correspondence between a ranking of the sectors’ recent returns and the historical pattern) to minus 1.0 (which would mean a perfectly inverse correlation). To quantify how much the sector relative strength rankings have shifted in a bearish direction, consider the correlation coefficients that I calculated. As the chart shows, these three have performed relatively well over the past three months. In contrast, according to Ned Davis Research, Consumer Staples, Health Care and Consumer Discretionary are the sectors that have performed the best, on average, over the three months prior to past bull-market tops.
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