No Bull

Observers have been comparing stock market dynamics with Taoist concepts for many years now; Bennett W. Goodspeed’s book, “The Tao Jones Averages,” was published in 1984, for example. It’s a reasonable idea; the longstanding bull and bear symbolism lends itself readily to analogy with the yin and yang of Chinese philosophy.

In the Wall Street mainstream, unfortunately, the current understanding of what constitutes a bull or bear market is pretty superficial. Many analysts and financial journalists insist that a bear market is a decline of 20 percent or more, which is an arbitrary, meaningless and ultimately useless way of looking at the market.

If bull/bear really is equivalent to yin/yang, then there must be fundamental qualitative differences between bull and bear markets; it isn’t just a matter of whether the market is going up or going down. And there are a number of technical analysts who have said just that for many years, arguing that bull markets are structurally different from bear markets, and noting that, for example, a rally can occur within an ongoing bear market without reversing the overall trend.

One example that has been noted fairly widely: Bear markets tend to move faster than bull markets; that is, the market falls by larger increments and in less time than it rises in bull markets. And even a fairly superficial look at the data supplies some confirmation of this view. Using a database of daily closing prices for the Dow Jones Industrial Average from 1896 to the present, the average percentage change on up days has been 0.750 percent, while the average change on down days has been 0.774 percent. On the other hand, 52 percent of all trading days have seen advances, while 47 percent have seen declines, with about a half-percent showing no change.

It occurred to me that there might be a way to use this information as a sort of trend indicator. What I did was compare the 20-day median percent change in the index with the overall average of up days (i.e., 0.750 percent) and the equivalent average for all down days (0.774 percent). Then I plotted all days when the current 20-day median was above the up average or below the down average. Here’s the result, along with the Dow for comparison:



I'm sorry the dates aren't clearer; I'm just learning to use the image upload on this site. But two things jump out from this chart. First, periods when the 20-day average change is above or below the long-term up or down average are fairly rare. Second, we’re in one of those periods right now.

That’s right: Starting on Oct. 10, the 20-day median percent change in the Dow fell below the 118-year average for down days, and it has continued to fall further below it, as of Monday’s close. It’s now about a full percentage point below the long-term average and is at the lowest level since early 1932, during the worst of the fierce 1929-32 bear market.

I don’t know whether this bull/bear indicator has any predictive value, but there is one thing that might be worth noting: In general, the lowest readings on this indicator have coincided with the steepest phases of bear-market declines – NOT with the end of the decline. So even if we were to take an optimistic view that this indicator has reached its lowest point, it still wouldn’t preclude the Dow from falling significantly lower.

Update 4:35 p.m.:

Today's 889-point jump in the Dow had no effect on the bull/bear indicator described above. In general, all it did was carry it back toward the upper end of the downward-tending trading range it has been in for the past three weeks.

Also, a little more explanation about the chart above: Ostensibly bullish moves are those above the zero line, shown in red to represent "fiery yang energy," as they say; bearish moves are those below the zero line and are shown in blue, representing "cool, watery yin energy."