Why Today's Pullback Could Be a Buying Opportunity

Today's stock pullback could present a buying opportunity for investors, but beware upcoming market events

Sep 9, 2016 at 3:41 PM
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Stocks are on pace for their worst session since the June 27 post-"Brexit" fiasco. The S&P 500 Index (SPX) is on track to snap its longest "quiet streak" in years -- currently down 1.9% -- and the Dow Jones Industrial Average (DJIA) is hot on its heels, plummeting over 315 points so far, or 1.7%. Before traders despair, however, it's important to consider that today's fall could actually present an opportunity to invest, if recent history is any indicator.

The left two tables below, courtesy of Schaeffer's Senior Quantitative Analyst Rocky White, shows 2016 data for the S&P 500 Index (SPX) and Dow Jones Industrial Average (DJIA) after the indexes fell by at least 1% in a single session. The two tables on the right show 'anytime' returns for the SPX and DJIA.

SPX DJIA 1 returns

The average 'anytime' two-week return for the SPX and DJIA are 0.73% and 0.70%, respectively. Compare this to when the indexes fall by at least 1% in a single day. When this happens, the SPX is 1.34% higher two weeks later, on average -- a return rate 83% higher than the average 'anytime' return rate. For the DJIA, the average two-week return after a 1% or more single-session decline is 1.02%, or a nearly 46% increase on the average 'anytime' returns.

In addition, according to the American Association of Individual Investors (AAII) survey, market sentiment has been lukewarm for a record 44 weeks. "Neutral" investors currently outweigh market bulls, meaning the typical "euphoria" associated with market peaks is notably absent. From a contrarian standpoint, this suggests today's breather could be temporary, and stocks could resume their quest for record highs.

However, it's worth noting that the 38th week of the year (we're currently in the 36th week) has been especially weak for the S&P, going back to 1990. According to Schaeffer's Quantitative Analyst Chris Prybal, the SPX has lost 1.46%, on average, that week, with a win rate of just 27%. And it just so happens that the highly anticipated September Fed meeting falls in the 38th week this year.

SPX weekly return 2


Likewise, the CBOE Volatility Index (VIX) -- or market's "fear gauge" -- typically has the second biggest advance of any week during the 38th, gaining 7.3% on average. Further, the VIX has ended the week higher 65% of the time.

 

VIX weekly return 2

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