Not just living beings or material objects age with time – market trends grow old too.
The stock market moves either up in the long-term (the primary up-trend) interspersed with shorter counter-trends (the secondary corrections), down (the primary down-trend) interspersed with shorter counter-trends (the secondary bear market rallies), or sideways in a range for a substantial amount of time.
Though range-bound trading is very difficult to categorize and characterize, trends and their countertrends are easy to discern in hindsight – which we can use to a small degree to analyze current markets.
Market Age Profiles
We can measure how far each has moved from bottom to top (or vice versa) in history, and thus get what Wall Street Pro Victor Sperandeo calls ‘Market Age Profiles’.
For example, if you take all primary up-trends (“bull markets”) in history found on a given market index, and measure their %-extents and time durations from bottom to top, you will get an array of numbers that you can order by magnitude/length. This typically gives you a wide range of values, of which some occur more frequent and are more ‘average’, i.e. more likely to be encountered in the future, and outliers in both longer or shorter up-trends less frequently encountered.
There is no “average” trend of course, as much as there is no “average” stock – they will vary for a myriad of reasons in how long and far they run. That however doesn’t mean that how far and long you can expect them to run doesn’t follow certain profile of probabilities.
The shape of this profile will typically take that of a bell curve, showing a distribution of how short/long and small/big historic trends and counter-trends have been.
Knowing how far the average secondary bear rally, primary up-trend, primary IM up-swing etc. has run in history gives you another piece of information to hold the current market that your analyzing against.
For example:
- if the current primary market up-trend is in duration and %-extent below the average, you can reasonably assume that the odds of the trend continuing upwards are higher than not
- if the current secondary reaction has been going on much longer than most in history, the odds of it resolving to the up- or down-side sooner than later have grown radically
- …
See below a table encompassing the important stages of trends and counter-trends for the NASDAQ Composite since its launch in 1971:
For each described stage you can find the average %-extent and duration in trading days (td) in the middle. Left of it are those that were shorter/smaller, and right of it those that were longer/larger.
If you measure the %-extent and duration of your current market stage on the NASAQ Composite, and compare them with the above table, you can judge your odds of the current market stage continuing (higher odds/probability on the left, lower on the right).
The shorter & smaller %-extent currently is compared to the average, the less likely (the smaller the odds) it is that the current state will stop soon – the further you move beyond middle the less probable it is that the state the market is currently in will stay in its state (trend or counter-trend).
See below the market age profile applied to a secondary (bear market-) rally in 2022 on NASDAQ:
Market age profiles yield supportive information to pinpoint where you might be – they should never be used by themselves as decision-making tools. Many (counter-)trends will run longer or shorter than average, as they are driven by a multitude of factors – the market couldn’t care less about statistics.
Also, they are by no means a timing mechanism, but they can give additional evidence of where a market is and could be heading when you facet them into your market health analysis.
Measurement criteria
- Primary up-trend: Up-wards moves ranging >30%, measured from the absolute Lows to absolute Highs
- Intermediary (IM) up-swing: Measured from the old Highs of the prior secondary reaction to the Highs made just before the next (or the market top of the primary up-trend)
- *** an exception is found with the first IM up-swing found in a reliable new primary up-trend off a major bear market bottom (measured from the first higher High after a primary down-trend). Those up-swings tend to run almost double as long as the average IM up-swing, due to the major washout of sentiment and available institutional capital firepower at the sidelines near true market bottoms.
- Secondary reaction (counter-trend): Down-wards moves of 8-15% within a primary up-trend, measured from the Highs made to the Lows of the reaction. Frequently retrace 33-66% of the %-extent of the preceding IM up-swing.
- Primary down-trend: >15% in decline, measured from the absolute Highs to the absolute Lows.
- Secondary rallies (bear market rallies/bounces): Measured from the last lower Low to the lower High made. Commonly range only 2-3w around 10%, however bear markets are very volatile and any left over-bullish sentiment from a recent top can lead to amateur quickly flooding the market again during such rallies, sometimes driving them to ranges of 80td or longer and up to 52%, as e.g seen in the dot-com bear market.
