S&P's Sam Stovall finds that an extreme number of industries posting negative returns in a given period may point to a recovery in equity prices
From Standard & Poor's Equity ResearchThe reason market timing is so tough—at least for me—is that while it may be relatively easy to get out of stocks, it's very difficult to know when to get back in. What's more, I usually decide it's safe to move back into equities only after the market has moved above the point where I got out. So now I talk to my self a lot. No, not in public—what, do you think I'm crazy? I just think about how far this market has fallen and how long and deep it will ultimately decline.
Through Friday, Oct. 3, 2008, when the S&P 500 closed at 1099, it had fallen 29.8% from the prior bull market peak of 1565 on Oct. 9, 2007. While this near-30% tumble approximates the average bear market decline of 32% since World War II, it also meant the "500" has given back 59% of the prior bull market advance. This is encouraging since the average giveback since 1946 has been 62%. What's more, the 49% decline suffered from 2000-02 retraced just a shade over 60% of the prior bull market advance.
The only thing that has sunk lower than equity prices over the past year has been investors' spirits. Since the end of the prior bull market on Oct. 9, 2007, through the date this current decline was tagged an official bear market (when it registered a decline of 20%), and through the tumult of the past few days, investors have suffered through a menagerie of emotions: anxiety, denial, fear, panic, and capitulation.
The Contrarian View
The only emotion we have yet to experience, in my opinion, is despondency. Prior to last week, many investors asked me, "Is it time to get back in?" Now however, I'm hearing "Is it too late to get out?" From a contrarian standpoint, this may be a good thing.
Using S&P 500 subindustry indexes (under the Global Industrial Classificaton System, or GICS) as a guide, I have found that when an extreme number of subindustries record negative returns over a rolling six-month period, this traditionally points to a near-term recovery in equity prices. Even though past performance is no guarantee of future results, since 1989 there have been three times that these extremes signaled near-term bottoms in share-price declines:
1. October 1998, after the S&P 500 fell more than 19% in response to the implosion of Long-Term Capital-Management;
2. Late September 2001, after U.S. equity markets reopened in the wake of the terrorist attacks on 9/11, and, finally;
3. Just two weeks before the ultimate low of 776.76 for the 2000-02 bear market—in which the S&P 500 fell 49%—was reached on Oct. 9, 2002.
Interestingly, the S&P 500 rose a liberating 17.76% just 13 weeks after these three peaks in the percentage of subindustry sell-offs. What about this time around? Through October 3, 77% of the subindustries in the S&P 500 have recorded 13-week declines, vs. the average 42% and the high-water mark of 100% set on July 19, 2002. On a rolling 52-week basis, 92% of subindustries are in negative territory, vs. an average 35% and a peak of 96% recorded on March 7, 2003.
On a rolling 26-week basis—the one that most closely signaled the end of the 2000-02 bear market—the 92% current reading is more than twice the average 39% and close to the peak of 98% recorded in late September 2002.
Is it time to buy? Only a brave soul with a disciplined, long-term investment outlook will be able to brag that he had enough courage to step up and buy when nearly all subindustries had fallen. Will that be me? I'll let you know.
Industry Momentum List Update
Here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (12-month price performances that were among the top 10% of the industries in the S&P 1500), along with a stock that has the highest S&P STARS (tie goes to the issue with the largest market value).
S&P STARS Rank
Fertilizers & Agr. Chem.
Health Care Equipment
Health Care Services
Procter & Gamble
HyperMarkets & Super Centers
Packaged Foods & Meats