Where Does the S&P Go After Bad Opening Weeks?

The SPX is on track to notch one of its worst opening weeks in history

Jan 8, 2016 at 7:31 AM
facebook twitter linkedin


2016 has gotten off to a hellish start, between North Korea's bomb detonation and China's trading halts. Through the first four days of the calendar year, the S&P 500 Index (SPX) is down 4.93%. Since we can't do anything about the past, the focus now shifts to what this could mean going forward -- specifically, what are the implications of a bad first week for the future?

To help us answer this question, we enlisted the help of Schaeffer's Senior Quantitative Analyst Rocky White. Below, you'll find the chart he produced, which shows that the SPX is currently on pace for its second-worst opening week since 1928. Ouch.

160107worstweek

Looking at the first five sessions of the year, the SPX has lost 2% or more 12 times in the past 87 years, including 2016. The 11 prior signals suggest we could see outsized gains for the rest of January.

Specifically, the average January gain after a 2% (or more) first-week loss is 1.32%, with 63.6% of the months positive. That compares favorably to "other" years, when the typical January return is a more modest 0.46%, with 57.9% positive. That said, it's worth noting that the median return is negative 0.42% -- suggesting that when the SPX finishes lower in January after a rough first week, it finishes way lower.)

However, things aren't nearly as rosy for the rest of the year. The average full-year return after a poor first week is negative 0.16%, versus a typical annual SPX gain of 7.31%. Meanwhile, the percentage positive drops by 10 percentage points, to 54.5% from an anytime reading of 64.5%. This includes the market crash of 2008, when the SPX went on to lose 35%, even after shedding 5.3% in the first five sessions.

To summarize, traders may want to keep a short-term horizon if they're attempting to capitalize on this week's pullback, as a rebound is far from guaranteed. And, as always, they should keep an eye on several technical levels that may help dictate where the SPX heads next.
 

 

 

These investors are using the market's volatility to their advantage and scoring triple-digit gains on many of their trades.

Even in today's sideways bear market, this trading strategy has continued to provide consistency and profitability to a small group of investors. By using this approach, these traders are removing directional risk and still hitting triple-digit returns. If you want access to this strategy, and lower risk with higher returns sounds good to you, then don't wait another minute.

Join us now to receive our next trades the moment they come out!

 

Common mistakes options traders make
 


 


 
Special Offers from Schaeffer's Trading Partners