Investors are feeling understandably fatigued following an incredibly volatile week for stocks.
Heading into Friday, it looked like the S&P 500 was set to potentially post its worst week on record - until President Trump’s late-in-the-day news conference Friday assuaged coronavirus concerns, sending markets ripping higher in one of the largest single-day percent gains on record.
Now, with some time for Mr. Market to digest over the weekend, the big question is what happens next.
Luckily, we’re not in totally uncharted territory. To paraphrase the old Mark Twain quote, history doesn’t repeat itself, but it often rhymes. Likewise, statistically similar environments can offer some guidance for what’s likely to happen next.
To figure it out, we’re turning to the data to see what the likely next move looks like for the S&P 500.
As far as similar periods go, 2020 has kicked off with some less-than-auspicious analogs:
Looking at prior similar-sized drawdowns from record highs in the S&P 500 (and its predecessors) stretching all the way back to 1928, only 1987 and 1929 have seen stocks reverse course and shed more than 20% within 50 trading sessions of an all-time high.
And while 2020’s selloff has clearly been the fastest by far, the move has actually correlated extremely highly with both of those other notorious bear markets.
The key differentiator here is what’s driving the selling: both 1929 and 1987 were primarily market-driven drops, whereas 2020’s is being fueled by a pandemic event.
Don’t read too much into the 1929 comparison at this point. Another big difference is how the two resolved - while correlations between 1929 and 1987 were sky-high in the first 100 sessions or so following the market highs, they turned negative shortly afterward as markets recovered in the wake of the 1987 crash.
The speed of this year’s drop is also a factor in how long it could take to see a rebound:
On average, the S&P 500 has wound up 12% higher a year after hitting the 24.6% drawdown point that we entered Friday’s session under.
Even in years where the market continued to track lower longer, stocks were almost universally back in an uptrend at the 100-day mark. So, what’s more likely from here - immediate upside or a months-long fade?
It all boils down to how things hold up at the open Monday. Heading into the new week, the S&P 500 is right at make-or-break mode:
While it looked like the S&P was going to materially violate the primary uptrend that’s been in play for the last decade last week, Friday’s final-hour rebound rally spared us from that fate.
That means that if shares can stage a bounce here, a bottom could potentially be in.
On the flip side, if the S&P 500 fails to hold support in the week ahead, considerable downside risk gets opened up - down to December 2018’s lows at a minimum.
Either way, the wisest trading plan remains the same: Don’t try to anticipate the bottom. Instead, wait for buyers to establish some semblance of a new uptrend before jumping into buy-mode.
With its primary uptrend still in play, markets got a major reprieve. We’ll soon see if it holds.