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Two-thirds, one-third rule

In September of 2007, roughly a month before the stock market peaked, Austin and I wrote an SMI cover article titled "Beating the Bear Market Blues." In it, we referred to investment advisor Ken Fisher's book The Only Three Questions That Count regarding a bear market tendency he calls the "two-thirds, one-third" rule. Here's how we summarized what Fisher writes on pages 293-294 of his book:

He explains it this way: bear markets have a tendency to experience just one-third of their total decline during the first two-thirds of their lifespan. Then during the last one-third of their duration, they cause two-thirds of their total losses. While that's a bit of an oversimplification of the historical record, it captures the general "late acceleration" idea quite well.

During my fever-induced delirium last week, I thought about this "rule" and wondered how it has held up so far in this current bear market. Of course, we can't really know for sure, because we don't know when this bear market will be over. But interestingly enough, when I started playing with the numbers this afternoon, this is what I found.

The bear market started exactly 17 months ago, using the Oct 9, 2007 peak in the S&P 500 as the beginning point. Two-thirds of the duration of this bear market would have been a little over 11 months, which would have been mid-September of last year. Interestingly enough, over the first two-thirds of the bear market (so far), the market fell 35% of the total distance it has to date.

Of course, that means that over the last one-third of the duration of this bear market, stocks have lost 65% of the total decline. In other words, if the bear market were to end today, Fisher's two-thirds, one-third rule would almost exactly describe the behavior of this bear market.

I need to emphasize that I don't feel this information proves that we're at, or near, the ultimate bear market low. I just thought it was interesting, and I was surprised it was so close to the formula when I looked up the data.

If you're looking for something useful to glean from it, I suppose it would simply be that the way this bear market has unfolded over the past 17 months hasn't been so unusual. You might even say it's been rather...predictable. Sure doesn't feel that way, yet there it is in black and white, written well before the last market peak had even been reached.

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