Last Thursday most of us in the U.S. stock market were rocked by the large daily falls which took place last Wednesday and Thursday. The S&P 500 Index closed on Thursday below its 200-day simple moving average, not necessarily a sign of a bear market, but certainly a warning sign of danger. Friday therefore looked as if it was going to be a significant day, and it was, with the price recovering from initial losses and the day ending with the market’s close near to where it opened the session.
The week ended with the S&P 500 Index somewhat higher than its lows, but still down by 3.52% over the week. So, what is next for the market? Can we put these developments in a historical perspective? We can, by looking at historic price data, although we must always take these exercises with a pinch of salt.
A notable property of the American stock market in recent decades has been its resilience. Bear markets do not usually take strong, long-term roots, but tend to happen when the price is below its level of 6 months ago. So, I am going to look at every time the Index fell by more than 3.52% in a week within the last 50 years while the price was above its level from 6 months ago, as it is today – i.e. in a bull market. How do the results look?
There have been 61 weeks in a bull market where the price ended the week down by more than 3.52%. What happened next?
The following week closed up 61% of the time, producing an average gain of 0.25%.
The following month closed up 59% of the time, producing an average gain of 1.31%.
The following 3 months closed up 77% of the time, producing an average gain of 4.93%.
Now you know why they say in the Americans stock market, “buy the dips in a bull market”. It seems clear the odds are still with the bulls, and this dip could be a buying opportunity.
On the other hand, if the price falls over the course of this coming week by another 4%, the price will be below its level from 6 months ago and will look to be in danger of further falls. So, its an interesting and crucial time for the U.S. stock market now.