Home About Archives RSS Feed

Independent Investor: What To Expect After a Waterfall Decline

Bill Schmick

It's been one heck of a two weeks. One would think the world was coming to an end, given the way global markets have behaved. You may not be able to make much sense of why markets sold off so quickly, but out of the carnage we may be able to predict what comes next. Here's why.

Stock market free falls, such as the one we are presently experiencing, are called "waterfall declines," which are sudden drops of 20 percent or more compressed into a few short weeks or days. They are fairly rare events and most follow a roughly similar pattern consisting of three phases.

The first phase is the decline itself followed by a sharp bounce higher. We may be experiencing that bounce right now. Following the bounce (and possible re-test of the lows), the market should drift into a basing period that could last for one to three months.

During that time the market could move up and down in a sideways pattern similar to what we experienced in May through June of this year. Finally in the last phase there is a rally lasting six to 12 months that could move the markets higher by about 25 percent.

In reviewing 10 waterfall declines from 1929 thorough 2002, three months after the post-waterfall low, the stock market was higher in all 10 cases. Six months later, the market was higher in nine of the 10 cases with the average gain at 17 percent. A year later, the market was higher in nine out of 10 cases with the average gain equal to 24 percent. The financial crisis of 2008-2009 was in a league all by itself. The market, three months after the low of March 2009, was up 37 percent.

If we drill down even further, say to the next two weeks, one can expect a "relief rally" of as much as 10 percent. Then, if the pattern holds, we should "re-test" the bottom. In this case, if we have truly found a bottom for the S&P 500 Index at around 1,100, we should bounce again from there.

"So what happens if we break down through that 1,100 level?" asked a nervous client from Manhattan.

The short answer is 1,100 wasn't the bottom and we go lower, by as much as 10 percent, to S&P 1,000.

Waterfall declines are often recession-related. There have been exceptions to that rule, for example, in 1987 the market fell sharply for two days only to spring back. The Dot-Com boom and bust of 2002 was another waterfall decline that did not usher in a recession.

So what is the best way to navigate through a waterfall decline and its aftermath? It is obvious that one should ride out the turbulence; at least for the next few months. If we are truly entering into a recession, the economic data will confirm that fear or dispel it. If we are going into a double-dip, then I advise you to get defensive—bonds, dividend paying stocks, etc.

But it may turn out that the market was simply correcting, as it does periodically after a long and profitable run. Remember, the S&P 500 Index was up over 80 percent in over two years, so a 20 percent pullback doesn't look as serious from that perspective. 

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.

Tags: waterfall, bounce, stocks      
News Headlines
Adams-Cheshire Weighs Emergency Amendment for Cheshire School
Mount Greylock School Looking For Regionalization Vote This Fall
North Adams Eyes Tax Title Sales For Tax Relief, Engineering
Compass Rose to Be Painted at North Adams Airport In May
Muraca Buys Nuclea Assets, Starts New Company
BCC Students to be Inducted Into National Honor Society
Local Schools Receive Olmsted Awards from Williams College
Berkshires Beat: Humane Race Kicks Off Spring
Biz Briefs: Berkshire Money Management Moving to Dalton
Norman Rockwell Museum Receives Donation from Chubb Following Return of a Stolen Painting

Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



Categories:
@theMarket (227)
Independent Investor (309)
Archives:
April 2017 (5)
April 2016 (2)
March 2017 (8)
February 2017 (8)
January 2017 (6)
December 2016 (2)
October 2016 (1)
September 2016 (9)
August 2016 (5)
July 2016 (7)
June 2016 (7)
May 2016 (5)
Tags:
Europe Currency Wall Street Crisis Japan Stock Market Deficit Pullback Election Commodities Metals Greece Markets Economy Energy Selloff Rally Federal Reserve Recession Housing Bailout Congress Debt Ceiling Oil Taxes Interest Rates Euro Retirement Jobs Fiscal Cliff Banks Debt Europe Stocks Stimulus
Popular Entries:
The Independent Investor: Don't Fight the Fed
The Independent Investor: Understanding the Foreclosure Scandal
@theMarket: QE II Supports the Markets
The Independent Investor: Does Cash Mean Currencies?
@theMarket: Markets Are Going Higher
The Independent Investor: General Motors — Back to the Future
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: Will the Municipal Bond Massacre Continue?
The Independent Investor: Why Are Interest Rates Rising?
The Independent Investor: How Will Wall Street II Play on Main Street?
Recent Entries:
The Independent Investor: Should College Be Free?
The Independent Investor: Tense Times in Trumpland
@theMarket: Uncertainty Descends Upon the Markets
The Independent Investor: Don't Let Romance Blind You to Finances
@theMarket: New Quarter, New Market
Living together is not what it used to be
Independent Investor: Don't Worry, Be Happy
@theMarket: Fed Rate Hike Sets Stage For More
The Independent Investor: Trump's Budget
@theMarket: Mushy Markets in March