Tips on Finding the Entry Point in
A Bear Market Drop
By LI ZHAO and OLIVER WOOLF
Stocks
Zhao is a charting market specialist at Bloomberg in Hong Kong.
Woolf is a data viz/technical analysis product manager.Let’s use Trading Signals to analyze bear markets in a more
quantitative way.
While still in the SPX Index ticker, type “trading signals” in
the command line and select TSIG - Trading Signals. The shortcut
is SPX Index TSIG.
Click the red Create tab and select New Trading Signal.
In the left-hand menu, scroll down to pick Maximum Draw-
down and give it that name in the amber box.
In the Rules section, click the amber box under Factor 1 and
select Max Drawdown. For Condition, choose Crosses Below. Click
the box under Factor 2 and choose Value. Type “-20” for the final box.
Give the Signal a name by typing “SPX Max Drawdown” in
the Signal Title box at the top left. Hit <GO>.
Click on Save in the red toolbar and Analyze.
Click the Daily amber box and change it to Weekly.
Change the start date to “3/14/1920.”
Change the Impact boxes to -5 and 52. Hit <GO>.
In the 52-week period after each of the 40 previous 20%
drawdowns, there were 30 gains and 10 losses. The mean perfor-
mance was a 9.2% gain. The maximum gain was 48% and the
maximum loss almost 49%. Note that some of the signals may
reference the same period of stock market fluctuations.
Click the gray Market Impact tab and look at the yellow
average line. The market impact analysis shows that, on average,
it took several weeks before the market began to recover.
Obviously this bear market, with its backdrop of a global war
on a deadly virus, has unique characteristics.WHEN IS THE RIGHT TIME to invest in stocks in a bear market? A
comprehensive study of S&P 500 index performance following
20% drawdowns in the past century shows positive 12-month
returns three quarters of the time.
Use Bloomberg charting and custom trading signals to
analyze similar trading patterns over the past century.
The S&P 500’s 27% decline from its 2020 high in three weeks
was the fastest in its history. The VIX gauge of equity volatility
surged to its highest since 2008. Rising Covid-19 cases in Europe
and the U.S. prompted authorities to tighten travel bans and to
shut down many activities. While such draconian measures are
aimed at slowing the spread of the outbreak as they did in China,
the costs of those steps have clouded the long-term global eco-
nomic outlook.
To visualize the worst historical bear markets over the past
50 years:
Type “S&P 500” in the command line and select SPX Index -
S&P 500 Index from autocomplete.
Type “logarithmic” and select GPL - Logarithmic Chart. The
shortcut is SPX Index GPL.
Click the Periodicity tab to the right of the word “Max” and
select Quarterly 50Y.
Right-click anywhere on the chart, hover over Annotate, and
select %Change.
Select the high of September 2007 and low of March 2009.
Repeat the process to measure the March 2000 to December
2002 and March 1973 to December 1974 bear markets.
In the past 50 years, there were three crises in which the
S&P 500 dropped about 50%: the 2008 global financial crisis, the
bursting of the 2000 dot-com bubble, and the 1973 oil shock.
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