S&P 500 Shows Pattern Similar to Start of Last Two Bear Markets

  • The index's 12-month average has fallen for two months
  • Declines of that length have occurred only twice since 1995

A pattern that accompanied the start of the last two bear markets is showing up in U.S. stocks.

Driven by a retreat since mid-August, the Standard & Poor’s 500 Index has seen its average price over 12 months fall for two straight months, data compiled by Bloomberg and MKM Partners LLC show. In the past two decades, declines in the average measure lasting two months or longer had only occurred twice, in the dot-com crash and the 2007-2009 bear market.

The deterioration reflects lost momentum in a 6 1/2-year bull market amid falling profits and the prospect of higher interest rates by the Federal Reserve. While the pattern doesn’t necessarily spell the death knell for the rally that started in March 2009, it highlights the damage done during the August selloff that sent the S&P 500 to its first 10 percent retreat in four years.

The chart is “among our biggest long-term concerns right now,” Jonathan Krinsky, chief market technician at MKM, wrote in a note Friday. “While we are not expecting anything like either of those bear markets, we think to dismiss this development at the present time would be a mistake.”

The last two times the 12-month average fell for more than a month, it kept on going. The measure started to fall in January 2008, about three months after the S&P 500 reached an all-time high, and didn’t turn positive again until October 2009. As the technology bubble burst in 2000, the trend started a slide that lasted for 32 straight months.

The S&P 500 has fallen 2.1 percent in September, pushing its 12-month average to around 2,048. In August, the trend measure ended a 38-month streak of gains after rising every period since May 2012, the longest since 2007. The benchmark index reached an all-time high of 2,130.82 in May and has since fallen 9.4 percent.

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