It has been a rough ride for investors. In fact, the S&P 500 has declined every week for almost two months straight, and the other indices haven’t fared much better. The Nasdaq is also down in seven straight weeks, while the Dow is down for eight.
It’s not very often we get a stretch this bad.
There tend to be opportunities to sell into a rally. We got one in mid-March, but it’s been all downhill since then.
At this writing, the S&P 500 is up 2.4% on the week, but I’m not sure many investors consider it out of the woods at this point.
Seven straight weekly declines is a pretty rare occurrence. This is just the fourth time we’ve seen such a streak since 1928. The prior three scenarios occurred in 1970, 1980 and 2001. Interestingly, all four declines concluded either in March or May.
To little surprise, there is good news and bad news associated with the declines.
The bad news: In two of the three declines, the seven straight weeks of declines turned into eight straight weeks of declines (in 1970 and 2001).
Further, in both of those years, the market went on to retest the lows, although the time it took varied widely. After the bottom in 1970, the S&P 500 went on to break the low about 4 1/2 years later, in Q4 1974. In 2001, the index broke to new lows a little more than six months later following the 9/11 attacks.
The good news: Each downtrend of this magnitude (seven straight weeks or more) has marked the low for at least six months. Further, the longest stretch did not exceed eight straight weeks.
The “tldr” is we may endure more short-term pain, but we also could be near an intermediate or potentially even a long-term bottom.
|4 Weeks Later||1 Quarter Later||6 Months Later||1 Year Later|
For instance, following the low after each stretch of seven or more consecutive weekly declines, the S&P 500 was higher four weeks later, one quarter later, six months later and one year later. That’s promising.
In 2001 we had a nice initial burst off the lows, climbing 15.4% a month later and 13.3% one quarter later, although those gains faded a bit once we got to the 6-month and 12-month marks.
In the other two instances, the gains were much stronger, particularly one year down the road.
What to Do Now?
It must be said as caution that not all these scenarios are alike. That’s particularly true in a span of five decades and when we’ve had only three other occurrences to compare with over the past 50 to 60 years.
We could decline 10 straight weeks or rally this week and decline for another seven weeks in a row. (I’m not saying it’s likely, only that it’s possible.)
At this very moment, we have inflation that may or may not have peaked, a wavering housing market, war in Eastern Europe and a hawkish Federal Reserve. Take out the inflation aspect of this and the Fed would likely be dovish, not hawkish and tightening rates.
Selling after such an egregious decline — the S&P 500 and Nasdaq are 18.2% and 30.3% off the highs, respectively — seems like a mistake at this point.
For some perspective, the Nasdaq fell 32.6% at the depths of the covid-19 pullback. Its peak-to-trough decline is currently 31.9%.
While it’s human nature to “protect what’s left,” it’s also in investors' interest not to be in the group that sells into the low during a marketwide capitulation. I’m not saying it’s easy, but investors should keep their wits about them, even when their emotions are running high.
That’s especially true when history, however limited, tells us that we are usually near an intermediate or long-term low after such a misery-filled stretch of trading.
Trading the S&P 500
As we look at the chart, the S&P 500 clearly is trying to find its footing in the 3,800s. That’s as it has traded below 3,900 in each of the past three weeks but continues to bounce.
If the index can clear 4,000 and then 4,150, there’s a realistic shot at a bounce into the 4,220 to 4,320 area. That’s admittedly a wide range, but with volatility this sharp, it’s easy for assets to overshoot key levels — both on the upside and on the downside.
If this is not the low and we trade below 3,795 — be it next month or in several months — then we have to consider the possibility that 3,400 to 3,500 is in play. There, we will find a bevy of levels that should support the S&P 500.
While it’s hard to be truly optimistic at the moment, it’s not irrational to be on the lookout for some type of rebound.
The question isn’t “whether” a relief rally will come. It’s “how long will it last and how far will it go?”