Written and copyright © 2010-2013 by Thomas N. Bulkowski. All rights reserved.
This article discusses how price recovers after a bear market. Do stocks that held up best rise farthest or do the beaten down stocks recover most? The answer may surprise you.
Price Recovery: Summary
Stocks that dropped the most during a bear market bounce back further than do those that retained more of their value on the way down. This mirrors the finding of Fosback,
discussed in his book,
Stock Market Logic: a Sophisticated Approach to Profits on Wall Street.
Price Recovery: The Method
I used my database of stocks and found 472 that contained data from March 24, 2000 (the start of the bear market in the S&P 500 index) to March 8, 2010, one year
after the 2007-2009 bear market ended.
For each stock, I logged the closing price on the following dates.
- March 24, 2000, the start of the bear market;
- October 10, 2002, the end of the bear market;
- October 10, 2003, one year after the end of the bear market;
- October 11, 2007, the start of the bear market;
- March 6, 2009, the end of the bear market;
- March 8, 2010, one year after the end of the bear market;
All of these dates correspond to major peaks or valleys in the S&P 500 index and the recovery a year later. Each stock, of course, will not have made the same peaks or valleys
at the same time. But treating each stock in a similar manner will give an indication of how they behave as a group.
Price Recovery: Results
The 472 stocks in the study during the 2000 to 2002 bear market lost a median of 49% of their value and gained a median of 54% a year after the bear market ended.
In the 2007 to 2009 bear market, the test stocks dropped a median 57% and then recovered a median of 89% the next year.
Using those median values as the separation between large and small declines, I found the following, shown in the table.
1 Year Later
1 Year Later
|2000-2002 Bear Market|
|Drops more than 49%||107%||158%|
|Drops less than 49%||29%||45%|
|2007-2009 Bear Market|
|Drops more than 57%||145%||223%|
|Drops less than 57%||61%||69%|
For example, those stocks with drops more than the median 49% in the 2000 to 2002 bear market gained a median 107% a year after the bear market ended. This compares to a
median rise of just 29% for those stocks making a more shallow bear market drop (that is, they dropped less than 49%).
In the 2007-2009 bear market, stocks followed the same trend. For those stocks that declined more than the median 57%, they saw a recovery that averaged 223% a year after
the bear market ended. This compares to an average rise of just 69% for those stocks that declined less than the median 57% in a bear market.
In both bear markets, the numbers show that after a bear market ends, stocks that dropped most make the largest gains a year later. Stocks that dropped least (retained more of their
value) rose less.
This matches a finding discussed in FosBack's book, Stock Market Logic. He writes,
At major bear market troughs, for example, relatively weak stocks tend to bounce up fastest, while stocks which have failed to decline much in the preceding
bear market are often stodgy issues which rarely provide outstanding profits in any kind of market.
I don't know if Fosback really meant fastest (alluding to time) versus furthest. I didn't test how long stocks took to make the recovery only that they
made their move 1 year after the bear market ended.
-- Thomas Bulkowski
Written and copyright © 2010-2013 by Thomas N. Bulkowski. All rights reserved. The reason computer chips are so small is that computers don't eat much.