Here's How the S&P 500 Could React to its Recent Drought

Plus, how long it might take for the index to reclaim its former highs

Senior Quantitative Analyst
Apr 13, 2022 at 8:03 AM
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The last all-time closing high on the S&P 500 (SPX) was the first trading day of 2022 -- over four months ago. Since then, the S&P 500 ultimately closed about 13% off the high before bouncing up into no man’s land between the all-time high and recent lows. Stocks have trended upward for most of the time over the past several years, and I figured this was one of the longer stretches of time we’ve gone without seeing a new high. I found that the last all-time high was 68 trading days ago. It’s the sixth streak of this length over the past ten years as you can see in the chart below.

As I often do, this week I first take a broad look at how stocks have behaved after similar circumstances, and then boil it down further to focus on those times that most closely resemble the current environment.

68 Trading Days

Where We Go From Here

With help from the below data on the SPX going back to 1950, I looked at each time the index hit an all-time high and then retreated from that level and was still below it 68 trading days later. The first table below summarizes the index returns going forward after 31 previous occurrences. The returns out to six months are in line with typical market returns, present in the second table below. When you get out to a year, there is underperformance based on the average return. The S&P 500 averages a 4.95% return over the next year, with 61% of the returns positive. The typical one-year return over this time is over 9%, with 75% of the returns positive.

SPX After 68 Days

What if we only consider the returns that mimic the current environment? I mentioned earlier that the S&P 500 has closed about 13% from its all-time high, but has rebounded from there and still sits more than 5% from the peak. Therefore, I specifically looked at times where the SPX last hit a high 68 trading days ago -- with the drawdown from the high being between 9% and 20% -- but then it moved higher, and still sat more than 5% from the high. I got 10 previous returns. The results are not good with the underperformance occurring earlier. Six months after one of these signals, the S&P 500 averages a gain of 1.62%, with just 40% of the returns positive. The typical six-month return is about 4.5%, with 70% of the returns positive. The S&P 500 averages a slight loss a year after one of these signals.

2_SPX After 68 Days

The table below lists the individual occurrences that generated the data in the table above. Two signals occurred over the past seven years, and both times led to a choppy market that ultimately had satisfactory one-year returns. The last two columns of this table show how long it took for the index to get back to its all-time high, and how much further below its prior low it ultimately fell before recovering. The median amount of time it took to get back to its high was 13.1 months, with a median drawdown of 8.8% below the prior low -- implying a fall of about 14% from current levels. Hopefully, this is not what it looks like this time going forward.

3_SPX After 68 Days


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