Is It Finally Time to Target the S&P 500 After 6 Weeks of Losses?

Similar pullbacks have meant strong short-term bounces for the index

Senior Quantitative Analyst
May 18, 2022 at 8:00 AM
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Sentiment is souring on stocks according to multiple sentiment surveys we track. It makes sense given the recent record of the S&P 500 Index (SPX). Six straight weeks of losses and down over 10% at this time of year for only the fourth time since 1950 has investors wondering if it's possible for things to suddenly turn around. Volatility also causes fear, and we've seen plenty of that. We're 93 trading days into the year and the S&P 500 has seen 47 days up or down by at least 1%. That's the third most since 1950. Twenty-seven of those days have been down by at least a percent, tied for second most. This week I'll look at how the index has performed after six straight weekly losses and how the rest of the year has turned out, given the poor, volatile market we've seen thus far.

Six Straight Weeks of Losses

Six-week losing streaks are not common for the S&P 500 Index. The last one occurred about 11 years ago in June of 2011. The index fell another 9% over the next three months after that but stabilized then and was higher by 4.3% one year after that six-week losing streak.

Since 1950, there have been 15 other times that the S&P 500 fell six weeks in a row. The table below summarizes how the index performed going forward. Compared to the second table below, now could be a decent time to make a short-term bet on the market. The four weeks after a losing streak, the index gained 1.57% on average, beating the typical return of 0.67%. The outperformance was notable despite the percentage of returns being similar. That's because stocks tended to see bigger gains than normal when these returns were positive, and slimmer losses when these returns were negative during the next four weeks. The early rally tended to be short-lived, as the 13-week return (about three months) averaged a small loss of 0.74%, while the S&P 500 typically gains about 2.2% in that amount of time. When you get out to a year, there isn't much difference in the returns of the two tables, so long-term buy and hold investors have no reason to panic.

iotw chart 1 may 17

A Lot of Volatile Days

As mentioned before, we are 93 trading days into 2022 (as of Monday's close) and the S&P 500 has moved at least 1% up or down on 47 of those days. That ranks third highest in all years since 1950. The table below shows the years with at least 30 '1%' days. Looking at the list of years is interesting. The year with the most was 2009 when stocks had bottomed a couple months earlier after the financial crisis. The most recent 2020 is still fresh in my mind as stocks were crushed at the beginning of the Covid pandemic. Then you have this year followed 2001 and 2000 which was the start of the dot-com crash. 

iotw chart 2 may 17

When I separate the years with at least 30 '1%' days against other years, I get the tables below. Daily volatility has been a bad omen for stocks for the rest of the year. In the years with at least 30 '1%' days, the rest of the year averaged a return of less than 1% with less than half of the returns positive. In other years, the rest of the year gained 6.22% on average with over 70% of the returns positive. In the short term, however, the high volatile years outperformed. Over the next month, these years averaged a return of 1.38% with 67% of the returns positive. Other years averaged a return of 0.25% over the next month with about 60% of the returns positive. Just like the analysis above, historically, our current situation has tended to have bullish short-term results but bearish longer-term results.

iotw chart 3 may 17

If you look at the table at the top of this section, it shows 57% of the '1%' days were down days. That's the highest of any of those years. The table below breaks up the returns in that table by whether most of the '1%' days were negative or positive. In the years where there were a lot of volatile days, but most of the days were negative (like this year), the returns going forward tended to be much better compared to if at least half of the days were positive. Over the rest of the year, when most of the volatile days were down, the rest of the year gained on average 5.62% with 67% of the returns positive. Otherwise, the S&P 500 lost 2.56% on average with just 33% of the returns positive. The bullish returns did, however, come at a cost. In those years with a majority negative one percent days, there was significant volatility. The rest of year returns saw four positive returns averaging a gain of 23.5%. The two down years averaged big losses of 30% for the rest of the year.


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