The Rare S&P Signal That Should Encourage Bulls

The SPX has historically outperformed following two-day losses exceeding 5%

Jun 28, 2016 at 8:24 AM
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It's been a broad-market bloodbath these past two trading days, following last Thursday's "Brexit" vote. Also, the U.K.'s decision to pull out of the European Union (EU) initially sent fear levels through the roof -- though volatility cooled yesterday, even as stocks continued to spiral. Getting into some specifics, the S&P 500 Index (SPX) just suffered its worst two-day loss since last August, dropping 5.3%. This is just the 17th time the SPX has given up at least 5% in two sessions, dating back to 1990.

While it's impossible to predict what will happen to stocks next, Schaeffer's Quantitative Analyst Chris Prybal crunched the numbers to see what's happened historically in the aftermath of sharp sell-offs, looking back to 1990. Below is the fruit of Prybal's labor, showing how the SPX fares after losing more than 5% over a two-day span:

spx after crash june 27

As you can see, returns are generally very strong after sharp two-day drops. The average return one week out is nearly 3%, with 62.5% positive (i.e., 10 out of 16 occurrences). Going out to three and six months, those gains swell to 7.1% and 11.9%, respectively, with the percent positives likewise trekking higher.

Based on the chart below, most of the figures mentioned above compare favorably to the SPX's anytime returns. On average, the S&P gains just 0.2% over a one-week span, 2% over three months, and 4.1% over six months. That said, it's still a relatively risky time to invest, as volatility -- as measured by standard deviation -- is higher almost across the board after market meltdowns. In other words, outsized gains are a possibility -- but so are outsized losses.

spx anytime june 27

As stated previously, the S&P 500 Index (SPX) gave up 5.3% between last Friday and yesterday -- just the 17th time this has occurred in 26 years. Losses were a slightly more modest 4.8% on the Dow. However, if you're interested in how the Dow has performed following 5% losses (since it's not that far off), feel free to check out the charts below:

dow after crash june 27

dow anytime june 27

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