Here Is What Will Happen to Stocks Over the Next 30 Days

The bottom is in. Will it hold?
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The S&P 500 pulled off a colossal rally to kick off Monday, reversing a selloff that had the distinction of being the worst week for stocks since the financial crisis.

While scientists around the world continue to work on treatments and vaccines for the cause of the selling - the coronavirus - the actual cure for the market selloff itself should come as a surprise to nobody. Monday’s massive 4.6% surge in the S&P 500 was fueled by the belief that the Federal Reserve and other central banks stand ready to prop things up.

That belief proved well-founded: The Federal Reserve cut rates half a point in a surprise emergency move on Tuesday.

While other G-7 finance ministers promised earlier Friday to use “all appropriate tools” to protect the global economy from the coronavirus fallout, after last week investors wanted them to open the doors to the inappropriate tools too.

Good thing for stocks then, that the Fed has fewer qualms about that.

So where does all of this leave stocks for the month ahead?

To figure it out, we’re turning to the charts for a technical look.

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Context matters. When we looked at things last week, markets were plunging. But there were some pretty clear lines in the sand – if the S&P could hold above them then the uptrend remained in play.

Sure enough, the S&P 500 managed to hold not only above its primary trendline stretching back to before the financial crisis, but also its intermediate-term trendline from fall 2018. For anyone hoping for any chance of upside in 2020, the fact that the S&P managed to hold above both of those two levels at this point is a very big deal.

Long term, the environment we’re in now isn’t remarkable. If we’re in the lower third of the S&P 500’s trend channel, it’s not by much.

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At this point, it’s a little premature to call the selling over, though.

Looking at the data, similar periods of dramatic selling going all the way back to 1933 have historically would up as buying opportunities. On average, these week-long losing streaks lead to 16.3% gains a year later, with the stock market in positive territory about three-fourths of the time.

But the caveat there is that volatility tends to widen in the first 100 days or so following the drop:

forward returns

In the next 30 days, the best-case scenario is some sideways consolidation that brings the S&P closer to the bottom of its primary trendline, setting the stage for a big leg higher.

A violation of that primary trendline, currently just below 2,800, or a Fed-induced overcorrection to the upside could put stocks’ long-term staying power in jeopardy.

(Then again, Tuesday's cool reaction to the Fed's emergency rate cut suggests that the former is a bigger risk than the latter right now.)

For now, the good news is that the likeliest scenario is for the rally to continue long term. But it’s still a little premature to jump into stocks - choppy, event-driven trading continues to look likely in the month ahead.