The FTSE-All Shares index fell nine per cent since peaking on June 15 (as of the close of business on August 15). It is a worrying decline although optimists continue to believe that we are just experiencing a temporary patch of stormy weather.
Unfortunately, several historical trends send a completely different message.
One worrying sign is linked to the large decline that slammed UK investors in the 15 trading day run-up to July 30. A scroll through all of the historical records finds eight other big UK drops during this 15-day period since modern stock market record-keeping began in the Great Depression. It is not widely known but a full-fledged bear market was running in seven of those periods. The single exception to the rule occurred in the tumultuous year of 1975 when shares temporarily dipped sharply in July after more than doubling in the first six months of the year.
This year's big July drop was number nine in this series.
Another bear market signal flashed at the close of business on August 15.
The FTSE-All Shares index has been declining since August began and was down by -3.9 per cent in the first 11 trading days of the month. This decline is quite atypical. August is usually a good point on the calendar for UK investors.
There were 10 other big drops during this summer period since the Great Depression. A full-fledged bear market was running in nine of those years.
We all know that historical relationships like these two offer no 100 per cent guarantees for the future. Even so, if the past is any guide, these trends warn that the bear market of 2007 is probably well and truly underway.
Longer-term historical trends tell a similar tale. Regular readers of this column will be familiar with the graph shown below. It highlights that the UK stock market has fluctuated within a narrow and well-defined rising trading channel for more than four years.
A search through 40 years of UK daily closing price data provides some useful insights into the significance of this trading channel.
There were dozens of other channels during the last four decades. But the majority either ran for a very short period of time, drifted sideways or were declining trends. Only 14 rising trading channels (like this one) ran for at least one year.
The most striking observation about these 14 channels is that 13 ended within two years. The single exception to the rule was a 35-month channel that ran in 1994-1997. In other words, history signals the current channel which has been in place for more than four years is clearly ripe for a decisive penetration. It is too early to say with complete certainty but such a penetration appears to be in progress as this article is being written.
It is worth noting that breaks through the bottom of the channel are typically followed by declines in excess of 10 per cent after the bottom of the channel is penetrated.
A few smaller exceptions to the rule were typically associated with extraordinary events. A good example occurred in 1992. A potentially serious mid-year decline broke down through the bottom of a channel. But the drop suddenly ended in September in that year immediately after the UK was ejected from the Exchange Rate Mechanism. A powerful rally kicked in once investors realised a weak pound and low inflation had positive economic implications. In other words, history signals that it takes very extreme economic circumstances to keep post-channel declines from falling by at least 10 per cent.
Once again, it is important to point out that a chart likes this offers no guarantees for the future. Even so, various historical trends support the same basic message. Stormy stock market conditions are likely in the months ahead.