CHAPEL HILL, N.C. — Oct. 9 is a fateful day in U.S. stock-market history.
That’s because not just one, but two, major market turning points took place on this day: Oct. 9, 2007, the top of the bull market that preceded the financial crisis, and Oct. 9, 2002, the bottom of the bear market precipitated by the bursting of the Internet bubble.
Numerologists, along with Nervous Nellies and paranoids, therefore are holding their breath.
They can relax.
The first reason to breathe more easily: If indeed the major trend is already shifting from bull to bear, the exact day of the top will be Oct. 3 in the case of the Dow Jones Industrial Average DJIA, +0.15% and Sept. 20 in the case of the S&P 500 index SPX, -0.04% Oct. 9, 2018, therefore would not assume any special significance in the history books.
The second reason not to get too excited that two major trend changes occurred on the same day: It’s something we would have expected anyway on the basis of nothing more than pure randomness.
To appreciate why, consider the famous “birthday paradox:” How many people do you need to have together in a room before there is a greater than 50% probability that two of them have birthdays on the same month and day of the year?
The surprising answer: 23.
Since there have been 73 major trend changes since 1900, according to the bull and bear market calendar constructed by Ned Davis Research, we therefore should expect that at least two of them would occur on the same day. In fact, there should be more than one such day.
And indeed there are—three more, in fact. Those other days, for those of you who are fascinated by the stock market’s numerology, are Jan. 5 (1953 and 1960), April 28 (1942 and 1971), and Sept. 21 (1976 and 2001).
From this historical perspective, therefore, Oct. 9 doesn’t appear to be all that special. Nor should it.
But there is a third, and far more fundamental, reason not to obsess about Oct. 9, or any other day, for the matter: Chances are overwhelming that on the day the market’s major trend changes, you won’t know it. As the saying goes on Wall Street, they don’t ring a bell at market tops.
To illustrate, I sliced and diced my performance database to see what the best-performing stock market timers were saying on the day of the two Oct. 9 trend changes. What I found was depressing.
Consider first Oct. 9, 2007, the first day of the 2007-2009 bear market, during which the S&P 500 fell by 56.8%—the worst bear market since the Great Depression. As you can see from the accompanying chart, the best-performing market timers on that day were recommending significantly higher equity exposure levels than those with the worst records. This was the case regardless of whether I focused on performance over the trailing one, five or 10 years. As a bear market begins, needless to say, it would be better to have a lower equity exposure than a higher one.
A similarly depressing conclusion emerges when we focus on Oct. 9, 2002. This was the last day of the 2000-2002 bear market, during which the S&P 500 fell by 49.1%. Since that day also marked the first day of the 2002-2007 bull market, [t would have been more advantageous to have higher equity exposure levels on Oct. 9, 2002 than lower.
And, yet, the best-performing market timers over the one, five and 10-year periods prior to that market turning point had lower recommended equity exposure levels than the worst performers. (See my second chart.)
The bottom line? The quest for picking the exact day of a market top or bottom is more about bragging rights than anything else.
Ernest Lefevre, author of the 1930s classic “Reminiscences of a Stock Operator,” put it best, back in the day when stocks traded in 1/8 increments, rather than by the penny: “One of the most helpful things that anybody can learn is to give up trying to catch the last eighth—or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough… to build a concrete highway across the continent.”