Dancing with the Trend

Drawdowns and New Highs


I’m not sure when I heard this the first time but I’m quite sure it was a long time ago.  “The markets go up most of the time,” or even to be more convincing, “The market goes up 40% of the time.”  I never challenged that until I got into the money management business and had to answer client questions and deal with their often misguided perceptions and misbeliefs.  So, like any good (or even average) engineer, I decided to calculate it.  As always, when feasible I use daily data instead of the “modern finance” norm of monthly data.  I’m going to sound like a broken record but I will never understand why one would ignore over 95% of the data.

So how does one determine the percentage of time the daily Dow Industrials has spent making new all-time highs since 1885.  First create a method (Highest High indicator) for following the movement of the Dow Industrials when it is moving upward, but when it is moving downward, that indicator only moves sideways.  In other words it only goes up with the Dow or sideways, never down.  The green line in Chart A (top plot, which also shows the Dow Industrials) does that.  The next plot (blue spikes) shows every instance in that 129 years (35,684 days) in which the green line was moving upward (Close of today greater than the close of yesterday).  The third plot has two lines; the blue one counts the number of days being analyzed by looking at all days in which the close <> zero (<> means not equal).  The second line (green) counts the number of blue spikes in the second plot (C <> 0).  And finally, the percentage of the values in the green line to the values of the blue line, yield the percentage of days that have made new all-time highs.  Got all that?  If you look closely at the black line in the lowest plot in Chart A, you can see that the percentage of times the Dow Industrial Average was making a new all-time high ranged between 1.5% and 4%.  Further observation on Chart A shows that the percentage rises during bullish periods and declines during bearish periods.  Just as expected, but also serves to help validate the process.

Chart A

Chart B is the same as Chart A; just that it shows only 6 years of data so the graphics are clearer. As of 12/31/2014, the percentage of time making new highs is at 3.81964%.  That is a long way from the 40% or just about any number you have ever heard from the mainstream Wall Street crowd.  In fairness, if looking at the ubiquitous monthly data, that percentage would be 16.54%.

Chart B

All good analysts should try to validate their analysis by backing into the situation from a different direction.  Let’s look at Drawdowns (see graphic at top of article) for the daily Dow Industrial Average since 1885.  Table C shows all of the Drawdown Durations in various percentage ranges.  Drawdown duration is the time spent in a state of drawdown, from the first day of decline until a full recovery (all the way down and all the way back up).  If you wanted to just look at bear markets which are drawdowns of 20% or greater the Drawdown Range column shows drawdowns from -100% to -20%, which are the bear markets.  You can see all of the bear markets in the Dow Industrial Average since 1885, accounted for 72.74% of the time.  If you wanted to count the bear markets (-20%) and the corrections (-10%), the amount of time spent below -10% would be 81.04% (72.74 + 4.07 + 4.23) of the time.  The total amount of time the Dow Industrial Average has spent in a “state of drawdown” from 2/17/1885 to 12/31/2014 is 96.18% of the time.

Table C

Okay, so we know from Chart A and B that the Dow Industrials made new all-time highs only 3.82% of the time on a daily basis.  From Table C we know that the Dow Industrials was in a state of drawdown for a total of 96.18% of the time (100% - 96.18% = 3.82%).  The arithmetic checks out; the Dow Industrials was making new all times highs only 3.82% of the time which means the complement of that is 96.18%, which is the amount of time spent in a state of drawdown.

I would suggest you study Table C as it shows bear market percentages (-100 to -20), corrections (-10 to -14.99), and pullbacks (-5 to -9.99).  The -0.01 to -4.99 is considered daily volatility.  The other range of drawdowns (-15 to -19.00) doesn’t have an official name, but I would name it “the area when all the talking heads and story tellers are calling for a bear market.”  The other thing to try to get a feel for is the duration columns.  This is the amount of time on average spent in those various drawdown ranges.  For example the Average Duration of Drawdown (Months) for the bear markets (-100 to -20) is 82.4 months; folks that is 6.86 years, and that is a really long time to hold onto losers and hope they recover.

Table D is exactly the same as Table C except that the bear market (drawdown) from the great depression data has been removed.  It clearly makes things look better, but making things look better does not change the facts.  Without that depression era bear the Dow Industrials was in a state of drawdown for 75.7% of the time.  Still a number much greater than the people other than Stockcharts.com users would have guessed. The average duration when the depression bear is removed drops to 63.43 months, or 5 years and 3 months on average.  This again can be devastating to one who is minimally capitalized for retirement and is withdrawing money to live on.  Most times, in those cases, there is never a recovery.

Table D

So what is the message of this article?  The markets do not move to new highs all that often, a huge percentage of the time is spent trying to get back to where they had previously been.  Something to keep in mind when the buy and hold salesmen are pounding at your mind.  I need to know if you enjoy this type of data and analysis on the markets; leave a comment.  Thanks,

Trade with knowledge,

Greg Morris


Greg Morris
About the author: has been a technical market analyst for over 40 years and is the author of several popular financial analysis books including Candlestick Charting Explained, Investing with the Trend and The Complete Guide to Market Breadth Indicators. Before retiring, he served as the Chief Technical Analyst and Chairman of the Investment Committee for a technical-based money management company with over $5.5 billion under management. Greg has appeared on CNBC, Fox Business, and Bloomberg Television and has also spoken at numerous financial conferences around the world. Learn More
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Greg, this is an excellent analysis- substantiates the need to actively manage portfolio and use sector rotation theory. Thank you
I love this type of research. So many of us marry old WS proverbs and think that they must be true.
Αs always.... great work
Great useful stuff. Keep it coming Greg. John
Great article/analysis...your works always give people a different view of the market...
Excellent article. Thanks for your time and effort.
Very nice analysis, and I greatly appreciate. Continue producing other like this.
Good information Greg, with this in mind maybe we should be holding the DJIA Short ETF DOG most of the time.
Very good insight. Keep it up and your book writing is also quite good.
A very well-thought-out presentation. How about a corallary article about the number of time periods where "buy-and-hold" gains have been wiped out by market plunges? (think October 19th 1987 or the October2007-March2009 plunge wiping out 5 years of gains.)
Nice analysis. Thanks
Love this analysis. How about sniffing out bottoms:how to tell when the draw down has turned up?
I appreciate this type of analysis very much, as I have found innumerable articles and books related to methodology but little to none regarding position sizing and money management. Thank you!
Dear Mr Morris I've been looking around for the data that you provided in Tables C and D for a couple of years now. Thank you & Cheers ... Peter
An eye opener specially for retirees and near retirees. Thanks. K.R.Soleja April 5, 2015
Greg, Oh the hubris of a solid engineer to go around ruining cherished and long-held fiction with research and supported conclusions! :) Keep up the good work! I learn something every time I read one of your articles. Blessings, John
I heard one speaker long ago describing participants in the market like bellybuttons- you are either and "innie" or an "outtie". This further validates my market preference (not bellybutton..) as an "outtie" and the numbers back it up. Great job Greg.
Very interesting. But I think the real test would be something like; from what per cent of market days is the return positive for holding periods of say, 1 year, 5 years, 10 years, 25 years, 50 years (the higher numbers representing buy and hold retirement savings). If I wasn't invested before, say, the 87 crash or the 08 crash, and then got in, I would be making money before the market returned to new highs. On the other hand, if I got in in 07 it would be a long wait.
Greg, love the number, plots, math and logic. But did you skirt the original thought and impetus for your investigation? So, you told us that all time new highs occur 3.8% of the time. Thank you. You answered this question: How often are new highs created? But how about the original statement, does the market move "up" 40% of the time?
Amazing article Greg. I am definitely reviewing my financial investments based on this info. Question would larger inflow of investment capital change the outcomes such as the privatization of social security?
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