Here is how the stock market trades after 5.0%+ selloffs like we saw last Thursday
The S&P 500 fell 5.9% last Thursday, marking its worst 1-day decliner since 16 March and its 5th fall of at least 5% in the past 3 months.
It was the worst decline since fear about the economic impact of measures to curtail the spread of the C-19 coronavirus chaos overtook investors’ psyches in March.
The DJIA lost 1,862 pts and the S&P 500 lost 5.9% to tally their worst one-day decliners since 16 March, according to Dow Jones Market Data.
Bespoke Investment Group noted that the broad-market S&P 500’s greater-than-5% fall, on the back of rejuvenated fears of an emerging 2nd wave of the illness derived from the C-19 coronavirus and a dovish but not so optimistic outlook from Fed Chairman Powell, was only the 28th time since Y 1952, when the S&P 500 converted to a 5-day trading schedule, that the index has fallen by at least 5% in 1 day.
5 of those decliners have been in the past 3 months alone.
The investment and research provider also noted that an unraveling of the market on a Thursday is a rarity, with all such previous Thursday 5%+ drops occurring amid the Y 2008 financial crisis and none before that, going back to Y 1952.
That said, decliners of this magnitude have historically been followed by sizable rebounds in the days, weeks and months to follow (see the table below).
Bespoke notes that, on average, the S&P 500 has rallied 2.14% the day after a decline of 5% or more, and has been positive the next day 81.48% of the time.
Of course, the longer the time fram, the greater the likelihood and intensity of the bounceback. About a year after such drops, the S&P 500 has averaged a gain of 18.92% and has had positive returns 82.6% of the time, Bespoke noted.
Check out the attached chart:
It’s important to note that last Thursday’s selloff may not represent the end of a Bullishness for stocks after they hit their lowest mark in a C-19 coronavirus chaos-inspired selloff on 23 March.
The Chief market strategist at SunTrust Advisory Services, said that valuations for stocks had gotten lofty after the run-up for equities from their lows.
For example, the DJIA remains up 35.2% from its closing low on 23 March at 18,591.93, the S&P 500 has gained 34.2% from that low, while the tech heavy NAS Comp Index is 38.4% above that low mark, even after Thursday’s decliner.
“After a 40%-plus rebound in the S&P 500 since March, stocks became stretched to the upside and vulnerable to bad news,” he wrote in a Thursday research report.
“Markets started to bake in a very smooth economic reopening process, even while we continue to expect it to be positive but uneven. Last Friday’s much-better-than-expected jobs report further lifted investor expectations, and with elevated expectations, bad news surrounding the coronavirus went a long way in hitting markets,” he wrote, referencing the sterling US Labor Department employment report last Friday.
Fed Chairman Powell last Wednesday, following the FOMC policy update, said during a press conference that investors should not overestimate the degree and pace of the recovery for the jobs market, noting that millions of jobs may remain unfilled due to forced closures and business shutdowns.
That said, my view is that the current retreat for the stock market represents a slow down on the road and frame for investors to digest the strong gains from the lows of the past few wks. Recognizing the parallels to the rebound from the Y 2008 financial crisis, when the stock market saw a similar sharp pullback on a longer road to recovery.
In Bull markets stocks pause to refresh and digest gains and tend to trade in a sideways pattern.
Check out the attached chart:
Remember, that past results are no guarantee of outcomes for the future, but be alert and always take what the market gives.
HeffX-LTN’s overall technical outlook for the major US stock market indexes is still Bullish with a Very Bullish bias.
Have a healthy weekend, Keep the Faith!