August 2015 And February 2016 Selloffs Weren’t Nearly As Emotional As 2008 And 2011 Selloffs by by Eric Bush, CFA – Gavekal Capital Blog
Emotion in the stock market can be tough to quantitatively define. There isn’t a stock market metric that we have found that could be considered the holy grail of measuring investor emotion. Therefore, we try to track symptoms of extreme investor emotion and one way we do that is by tracking the percent of stocks that are in a bear market over the past 50-, 100-, and 200-days. This helps us track emotion because when investors are very fearful individual security analysis seemingly ceases to exist and stocks are tossed out with the proverbial bath water. So in periods of extreme stress in the market the percentage of stocks that are pushed into a bear market dramatically and quickly spikes (a related idea is how correlations among stocks move quickly towards one during volatile markets). For example when fear was at its highest point during the financial crisis, in October 2008, 93% of US stocks were down at least 20% from its 50-day high. In August 2011, 65% of US stocks were down at least 20% of its 50-day high. We bring up these two periods because they are good examples of strong emotional selling in the market. These two examples helps us put the latest selloffs, August 2015 and February 2016, into proper perspective. In August of last year, only 25% of stocks fell into a bear market. February’s sell off was a bit more emotional as 37% of stocks were off at least 20% from its 50-day high. The comparative lack of emotional selling in the two most recent selloffs wasn’t constrained just to the US. For developed world stocks, 33% of stocks were in a bear market compared to its 50-day high on February 11th compared to 53% in October 2011 and 92% in October 2008. Because the most recent selloffs haven’t been as emotional, this puts into question for us whether a true cyclical price low has indeed been put in.