S&P Signal Suggests Stocks Are On Sale

This bullish indicator also preceded the 'Trump rally'

Oct 10, 2018 at 1:10 PM
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The S&P 500 Index (SPX) is notably lower today, with tech stocks pacing a broad-market decline. However, the index recently did something it hasn't done in three months -- and if recent history is any indicator, the signal suggests traders may want to buy the dip.

Specifically, the S&P ended at least 0.5% above its intraday low for three straight sessions: Oct. 5, 7, and 8. This signal has flashed fewer than 100 times since 2010, including on Nov. 9, 2016, at the start of the "Trump rally." The last signal, on July 9, 2018, preceded a healthy climb to new highs for the SPX.

SPX since january with last signal

One week after signals, the SPX was up 0.3%, on average, and was higher 63.5% of the time, per data from Schaeffer's Senior Quantitative Analyst Rocky White. That's better than the index's average one-week anytime return of 0.23%, with a win rate of 60.3%, looking at data since 2010.

Likewise, two weeks after signals, the S&P was 0.61% higher, on average, and in the black nearly 70% of the time. That's compared to its average anytime two-week gain of 0.46%, with a less impressive win rate of 63.7%.

SPX off intraday lows

In conclusion, the SPX's recent ability to pare its losses by the close has had bullish implications for the stock market index, historically. What's more, this Cboe Volatility Index (VIX) signal also suggests a rebound could be in the cards. However, keep in mind that after a break of Fed-day closing levels, any rallies back to this area are likely to be met with selling into the end of the month, per Schaeffer's Senior V.P. of Research Todd Salamone.


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