November Lows Entering Bear Markets (11/16/2018)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter on November 16, 2018. 

Several times, we have mentioned the fact that in a bear market, there is usually selling in October, followed by a strong October Seasonal rally, and then a failure of that rally in early November. If it is truly a bear market, new lows are made in November or early December.

We have conducted more research into this pattern to see if it might have some general tendencies for timing the November lows. First of all, the pattern noted above was very evident in 2000, 2007, and 2008 – all bear market years (or the beginning of bear markets). While there were October declines in 2011, 1990, and 1987, those really weren’t long-lasting bear markets. There was a bear market at the beginning of the Reagan administration, from 1980 – 1982, but it did not fit the pattern we have described. Prior to that, you have to go back to 1973 to find another long-lasting bear market.

The following table shows the November/ December lows, in relation to the Thanksgiving holiday. In each case the date is shown, and the number in parentheses is the number of days between that date and Thanksgiving.

Besides the longer-term bear markets, there were other years where there was a sharp decline in October, but it was only part of a much shorter-term correction. Ones that fit a somewhat similar pattern, with declines in November, but not necessarily breaking the October lows, include: 1987, 1991, 1994, and 2011. There were other short-term declines, though, where the market went straight up in November: 1990 and 1998, for example. Of course, this year we’ve already had a correction, so the ones that are relevant are the ones where a November decline occurred.

In almost all of the cases, $SPX made a new November low (that is, it broke the October low) before Thanksgiving, but just barely beforeThanksgiving: in 2000, 1994, and 1973, the November lows were made during Thanksgiving week. In 1991, 2007 and 2008 the lows were a couple of weeks before Thanksgiving, and in 1987, they arrived the week after Thanksgiving. So far this year, we have not made a new low yet, and we will be entering Thanksgiving week next week.

Furthermore, the absolute low price of November was made from 1 to 7 days after Thanksgiving, except for 1991 and 1994 when it was the day or two before. So, if past history plays out, and this is the beginning of a longer-term bear, we would expect that market to decline below 2600 within the next two weeks.

This article was originally published in The Option Strategist Newsletter on November 16, 2018.