Bear Market Started October 9, 2012
Will the bull market come to an end on October 9, 2012 and usher in a new bear market? Don’t laugh, it turns out that two of the most prominent market turning points of the last decade occurred on October 9th.
The first was the beginning of the 2002-07 bull market, which occurred October 9, 2002 — the Dow Jones Industrial Average on that date hit an intra-day low of 7,282.39, and the S&P 500 Index sank to 775.80 — more or less half the levels these indexes would rise to in five years’ time.
The second of those major turning points came as that 2002-2007 bull market was coming to an end. Believe it or not, its exact end was on October 9, 2007. In the ensuing bear market, the Dow and the S&P 500 would each lose more than half their values.
As of October 26, 2012 — the S&P 500 is now down 2 percent but could soon follow Apple Shares Down 15 Percent bear market.
You might think that there are almost impossibly low odds that two trend changes this momentous would occur on the very same day of the year. But you’d be wrong. In fact, this is a great illustration of how our gut instincts are poor guides to statistical truths.
Take, for starters, something that is far afield from investments but with which many of us are already familiar — the so-called “Birthday Paradox” — how many people do you need to have together in a room before there is a greater than 50% probability that two of them have birthdays on the same month and day of the year? The answer, believe it or not, is just 23.
Not dissimilar statistics help us appreciate how it could be that two major changes of trend occurred on October 9th.
Consider the 69 changes of the stock market’s major trend that have occurred since 1900, according to the precise definitions of bull and bear markets — given the resolution of the birthday paradox, we should expect several days to be the dates for more than one trend change.
Sure enough, in addition to October 9th, other such dates are January 5th, the 1949-53 bull market came to an end on this date, as did the 1957-60 bull market. April 28th, the 1942-46 bull market began on this date, and the 1970-71 bear market ended on it. September 21st, the 1974-76 bull market came to an end on this date, while the 2001-02 bull market began on it.
Well, what about the whole month of October. Aren’t there more changes of market trend during this month than in any other? Out of 69 major trend changes since 1900, 9 took place in October and is higher than the monthly average of 5.75 — two other months had nine trend changes each.