We Might be in for a Double-Digit Drawdown in the S&P 500 Based on a Data Metric.

Market Technician Wayne Whaley posted the following on Twitter (X):

A NEGATIVE FIRST THREE WEEKS OF FEBRUARY

The “First 3 Weeks of February” were down 0.45%. Since 1950, if the First 3 Weeks of February were negative, the following year (Feb21-Feb21) was a very normal 21-12 for an avg gain of 6.21%. But there is an interesting story behind those statistics.

In search of Bear Market Warning signals, I once requested of my computer that he scan every time span in search of those that had a statistically significant track record of forecasting a double digit down following year. It provided me with a handful worth following, one of which was the occurrence of a “Negative First 3 Weeks of February”.

It turns out that all eight of the S&P, post 1950, double digit down, Feb21-Feb21 years were preceded by a Negative First 3 Weeks of February. Note, that a “Negative 1st 3 Weeks of Feb”, preceded most of the three 50% Bear Markets of my lifetime, 1973-74, 2000-02 & 2008.

Billy Bull points out that in 12 of those 33, ‘Negative First 3 Weeks of Feb’ cases, the following year was double digit positive. So, if you are of a bullish persuasion, feel free to blow this study off as simply an aberrational product of an overly, ambitious, data mining exercise.

But if you are of the opinion that conditions are in place to give the S&P some problems in the next 12 months, the fact that all eight of the prior, post 1950, double digit down, Feb21-Feb21, years were each preceded by a “Negative First 3 Weeks of February”, might give you additional reason to pause.

Wayne basically asks the system to data mine, with no fundamental underpinnings and the system throw this out.

You can see they tend to cluster together. 5 of them clustered in that secular 1966 to 1982 bear market. The other three clustered in that 2000 to 2010 period.

I got curious if the performance of the small caps or micro caps have similar performance during those period, so since I have access to the Dimensional research indexes, which goes back all the way to 1927, I took a look at the subsequent 1 year performance (1 Mar to 28th Feb in the next year) for each period Wayne brought up:

My data is month by month, so they won’t exactly match up nicely. But you do see that the returns for all periods for S&P 500 and the US Large Cap Index (SP500 is a large cap index after all) were negative. Just that some were not double digits.

The drawdown in 1969 saw a greater magnitude of fall for the small cap and micro cap companies. But in some other periods, the small caps, particularly small cap value performance (US Targeted Value and Small Cap Value) can be even positive.

If the goal of the game is to stay in the game, and having parts of your portfolio do well when another doesn’t, then there might be some use with diversification.

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Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.

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