Inside Markets — Depth and Duration

Yesterday’s reflex rally took the SPX to key resistance in the 5450-5650 range that contains the downside gap post-April 2 tariff announcements and the 52-week VWAP for the SPX ETF (SPY) at ~5500. Over the last 20 years, the 52-week VWAP has served as a demarcation zone between bullish and bearish trends. Yesterday’s rally qualifies as a reversal, but a break above ~5500 without retesting the low would be an unusual development. In this case, a successful retest level includes any reversal from intraday levels between 4750-4950.

Bear markets (down >20%) can be structural, cyclical or event-driven but all all start with an exogenous shock of some kind. Structural bear markets are characterized by economic imbalances preceded by a financial bubble. Structural bear markets are rare and can last up to ~3 years with drawdowns as large as ~60%. The 2008-2009 Financial Crisis was an example of a structural bear market given imbalances in housing and leveraged mortgage products. Cyclical bear markets are most common and are usually triggered by policy tightening (higher rates) with peak-to-trough declines averaging 25-30% and lasting 6-12 months. Event-driven bear markets are triggered by an exogenous shock without economic imbalance or policy tightening. Peak-to-trough declines in event-driven bear markets also average ~25% and usually last 6 months or less. Covid in 2020 was the most recent example with a ~34% peak-to-trough decline over ~40 calendar days. The trough of a bear market often follows some form of policy intervention. For example, the March 23, 2020 trough followed the Fed backstopping Investment Grade credit. The current bear market of ~20% seems to be event driven and has lasted 59 calendar days thus far. Our initial estimate of a ~25% peak-to-trough decline lasting until mid/late Q2 still seems reasonable.