300 Point Moves on the S&P 500
The S&P 500 is closing in on an uninterrupted 300 point move off the November 2016 lows. This strong directional movement has occurred several times in the past. This week we looked at how recent 300 point (or near 300 point) moves have played out historically.
The table below shows the number of S&P 500 points gained during the rally, the duration of the rally in days, the length of time from the high point of the rally to when the correction began (measuring the length of the sideways topping phase), and the percent correction following the 300 point rally. We only considered uninterrupted 300 point moves. If a 5% (or greater) pull-back occurred, we do not consider the case. We also include cases where the S&P has come close to a 300 point straight shot move.
These euphoric one-way moves are rather rare, as the norm in bull markets has been for an ebb and flow of price action as stock indexes advance in small waves within a larger wave, as shown in the diagram below.
The current run has lasted 78 trading days, not yet stretched relative to previous occurrences. In terms of the point change on the S&P 500, we believe that we are getting close to a short-term peak. The only two prior instances of longer runs occurred after major down turns (2009 Financial Crisis and 2011 Sovereign Debt Crisis). Given that the current rally started from a high base, the current case is rather exceptional. Note also that the initial reactionary sell-off has not been catastrophic (-6% on average). These near-300 point runs have not reversed down immediately, as the topping process tends to play out over months.
Our view is that the U.S. equity market has gone too far, too fast on a shaky (speculative) foundation. We expect to see a sharp move down, perhaps over a day or two, before equities settle and eventually move back higher. We can not foresee a direct move back to 1800 on the S&P 500, although this remains our target for the next bear market. Expect backing-and-filling reminiscent of the tech bubble top, with several false starts to the downside. The chart below shows how the S&P 500 behaved after peaking in March 2000. Investors will need to be armed with patience over the next months, as we expect several false moves (in both directions) over 2017.
