Did the S&P 500 Go Too Far, Too Fast?

The S&P 500 Index (SPX) just enjoyed its most furious rally since February 2012

by Josh Selway

Published on Apr 21, 2016 at 2:48 PM

It's no secret U.S. stocks have been on a tear, with the S&P 500 Index (SPX) notching the second-largest quarterly comeback on record in the first quarter. Moreover, the SPX and the Dow Jones Industrial Average (DJIA) both enjoyed their best close of 2016 on Wednesday. Going from this settlement at 2,102.40, the SPX has added 13.4% over the past 50 sessions. Is that too far, too fast?

Obviously, this type of furious rally is uncommon. According to Schaeffer's Quantitative Analyst Chris Prybal, the SPX's recent push marks just the 29th time it's jumped over 13% in a 50-day stretch since 1972. What's more, this is the first time this signal has flared since February 2012 -- the start of a massive three-year surge. 

Looking back to 1972, the SPX has tended to outperform its "anytime" returns following one of these signals, according to Prybal's research. The only outlier is the 10-day post-signal return, which is flat, compared to the anytime return of 0.3%. 

SP 500 Index Returns 1

However, if you narrow the time frame to signals seen since 2000, it's a different story. Following a signal, the large-cap index has tended to underperform considerably in the short term, compared to its anytime returns. Most notably, the SPX has averaged a 10-day post-signal loss of 1.4%, compared to a 0.2% anytime gain, while averaging a 42-day post-signal return of negative 0.2%, compared to an anytime return of 0.6%. 

However, there's a big jump at the 126-day (six-month) marker, when the post-signal average return hits 4.7%, more than doubling the comparable anytime return of 1.8%. In the same vein, the SPX has been 7% higher, on average, one year after a signal since 2000 -- 75% better than its anytime one-year return of 4% in the new millennium. 

Also of note: Standard deviation is lower than usual across the board after a signal since 2000, meaning lower volatility may be ahead. Considering recent history suggests the S&P 500 Index may chop lower for a couple months after this monumental rally, is it a coincidence the index is trading lower today

SP 500 Returns since 2000

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