The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) just closed at its lowest price since November of 2020. Shares have dropped 24% from the all-time highs seen at the start of 2022. The NASDAQ 100 Invesco QQQ Trust (NASDAQ:QQQ) has fallen even further, losing nearly one third in that same time frame.
This puts both of these indices solidly in the bear market camp. A bear market is traditionally defined as a drop of 20% or more from the prior peak. In the past 92 years, there have been 21 such bear markets in the S&P 500 prior to the current one, according to Yardeni Research.
The average length of the previous bear market has been just under a year at 343 days. The longest bear market was in 1930 and lasted for 783 days. The shortest bear market was just 32 days and occurred during the Covid-19 crisis of early 2020.
The nastiest bear took place in 1930. It shaved over 80% off the market. The most gentle bear was barely a bear. This was the 20.6% drop from June 1948 to June 1949. Overall, the average bear market loss checks in at just over 37%.
Stocks tend to go through a bear market roughly every four years on average, but they have been less frequent since World War II (WWII) with an average of nearly six years between bears since 1942. The post WWII bears also have been a little less unpleasant with an average loss of just over 34%.
The post-war period has seen bear markets last a little longer, but with wider dispersion. The average bear market has been 366 days long since 1942, with both the longest bear and shortest bear taking place in this time frame. It is interesting to note that the last bear market was also the shortest. It lasted just over a month from Feb. 19, 2020 to Mar. 23, 2020.
The past decade has seen a plethora of pullbacks that exceeded 10%, but failed to get to the magical 20% level. Both 2011 and 2018 saw the S&P 500 drop over 19% before finally turning higher. 2018 in particular was on the verge of beardom after plunging 19.8% before firming. It was never officially a bear market, but sure felt like one to anyone looking at their account statement.
While looking back at history is useful, it is still more of an art than a science regarding how long and how deeply bear markets will ultimately go. Much depends on the impetus behind the plunge in stock prices and relative stock valuations before the drop. Higher valuations have led to larger drops.
Current Bear Market
The current bear market has gone on for just over 160 days with the S&P 500 down over 24%. If history holds, then we still have more downside to go before this bear ends. That is more likely, given that stock valuations were near historic highs before the most recent bear began.
A further 10% drop over the course of 2022 would put the market at the average bear for both time and duration. This would equate to SPY stock hitting roughly $330.
Longer-term investors looking to be a buyer at that level in SPY may want to consider selling puts. You get paid now for the obligation to be a buyer later and for a lower price. The fact that the VIX is at recent highs due to the weakness in stocks means option prices are comparatively more expensive, which is a good thing when selling options.
For example, selling the January $330 puts on SPY would currently fetch just over $15 per contract. Each put sold obligates the seller to buy 100 shares of SPY at $330. Selling these puts brings in $1,500 for each put sold. The net cost for SPY would be $330 to $15, or $315.
If SPY closes above $330 in January, you get to keep the $1,500 premium received for each put sold.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.