Stocks just won’t stop.

A little more than a month ago, the S&P 500 ^GSPC, spurred by the covid-19 pandemic, rolled over in dramatic fashion, showing investors the fastest 30% drawdown on record. 

Few could have imagined the situation we’re in now: While the economic data continue to be ugly, the S&P 500 is back to within 14% of all-time closing highs.

And the data point to even more upside ahead in May.

In a vacuum, the rebound from March’s lows has been astounding. The S&P is up more than 30% since March 23. Just to emphasize the size of the move: we’ve been enjoying a 615% annualized return over the past 49 days.

Of course, context matters. And the record snapback looks a little less ebullient given the fact that it was led into by the fastest selloff in history.

Still, it’s hard to argue with the trend here - and history suggests that more upside could be on the way in the weeks ahead.

To figure out what’s likely to come next for stocks, we’re turning to the data to see what we can glean from statistically similar time frames.

This year continues to correlate highly with two prior crash environments: 1929 and 1987.

Those two market regimes are unique in that they were the only other two substantial drops that came suddenly from records in the S&P 500 (or its predecessors).

Even now, 56 trading sessions into it, the similarities remain sky-high:


The chart above factors in the faster speed of 2020’s crash by speeding prior time frames linearly by 1.7 times - critically, the drawdown axis isn’t altered.

And it’s been a useful blueprint for the crash and rebound.

While the magnitude of the moves differs, the turning points line up incredibly well – both then and now. Back at the end of March, for instance, this relationship suggested we were looking at an intermediate-term bottom. And that’s exactly what’s happened.

In the past couple of weeks, we have seen the S&P 500 and the prior crisis regimes diverge somewhat. 

Most of that is due to the insane relative strength of the biggest tranche of S&P components; right now, the largest five stocks in the S&P make up about 20% of its value. They’re also among this year’s best performers.

What that means is that the performance of the S&P 500 in 2020 is largely decoupled from the performance of the average stock in the index. That’s happened just within the past 20 trading sessions or so.

(For that reason, the chart above tracks the S&P 500 Equal Weight Index, a better representation of the “average” S&P component right now.)

The good news is that means that we’re still very much on track with what stocks experienced back in 1929 and 1987. Volatility is higher this year, but rolling correlations between the periods remain incredibly strong:


In both of those prior periods, the price action was very similar for the first 100 sessions or so before they began to decouple. 

If that pattern continues for 2020, then we’ve got a pretty strong signal that we’re due for more upside in the weeks ahead.

Meanwhile, I’ll continue watching this space for a change in that relationship.