June 5 Closing thoughts

Up, Up, and Away

In a world where talk is increasingly cheap while real action is an endangered species, the equity market has put its money where its mouth is, surging 40%+ in the last 50 trading days capped off with a massive rally this week. This week’s 5% gain marked the third straight week that the S&P 500 was up over 3%. The last time that happened? September 1982. And before that you have to go back to 1940 and then a few other occurrences in the 1930s. Between the low on March 23rd through Wednesday (6/3) the S&P 500 rallied more than 39%. That’s the strongest 50-day move for the index since 1952
when the US stock market went to the five-day trading week. (Prior to 1952, the NYSE was open on weekends as well, and our historical daily data
pre-1952 for the major indices lumps the weekend’s move into Monday’s change. Thus, the 50-trading day rate of change prior to 1952 is not necessarily an apples to apples comparison with the same data post 1952.)

As you can see above, there have only been two prior 50-day moves of 30%+ since 1952, and those came in October 1982 and May 2009. Those two short-term massive spikes turned out to be just the first inning of multi-year bull markets. Given the lack of 30%+ 50-day surges, we broadened the filter to find all 50-day rallies of 20%+ for the S&P since 1952. Below are the seven prior occurrences, with the date shown being the first time the 20%+ threshold was crossed. During the current surge, the 20%+ threshold was reached last Wednesday, May 27th. Prior 50-day surges of 20%+ for the S&P have historically been met with further buying. In the month after 50-day rallies of 20%+, the S&P has averaged a gain of 4.63% with positive returns 100% of the time. Over the next three months, the S&P has averaged a gain of 7.6% with positive returns six out of seven times. The only time the S&P was negative over the three-month time frame was following the 1991 surge, but the decline was minimal at just 1.5%. Finally, over the next six months, the S&P has averaged a gain of 10.08% with positive returns 100% of the time. You cannot get better than 100%!

Not surprisingly, after the best 50-day rally for the S&P 500 in at least 75 years, the S&P 500 has reached levels that most would consider to be ‘extended’ in the short-term.
• Relative to its 50-day moving average, the S&P 500 traded more than 10% above its 50-day moving average late last week and into this week.
• These kinds of overbought readings have been extremely uncommon since 1952.
• The last occurrence was in April 2009, which like the current period, quickly followed a time where the index traded down more than 20% below its 50-day moving average.

Forward returns following prior periods where the S&P 500 traded more than 10% above its 50-day moving average have generally been positive.
• One month later, the S&P 500 averaged a gain of 2.19% (median: 2.16%) with positive returns two thirds of the time.
• Three months later, the S&P 500 was up an average 7.5% (median: 9.73%) with gains all but once, and the only time it was down was in 1955 when it dropped just 1.1%.
• Six and twelve months later, the S&P 500 was up all six times with average gains of 14.6% and 24.3%, respectively.

Given the huge rally in such a short period of time, investors might expect a pullback in the coming months for the Nasdaq 100. Historically, though, the rally continued. Below are the seven prior instances in which the Nasdaq 100 gained 30%+ in a 50-trading day period. For each instance, we show the first date that the 30%+ threshold was crossed (which in the current period was on 5/27).
• Historically, the Nasdaq 100 has gained an average of 5.19% in the month after these huge 50-day moves higher. That’s much stronger than the average gain of 1.27% for all one-month periods throughout the Nasdaq 100’s history.
• Over the next three months, the average gain has been huge at +12.58% with positive returns six out of seven times.
• Over the next six months, the index has again averaged a gain of 11.2% and a median gain of 13.73%. The only time the Nasdaq 100 failed to rally over the next three and six months following a 30%+ 50-day move was back in November 2001.

Watch list of Strong Stocks

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Are Investors Too Bullish or just Not Bearish?
The chart below demonstrates some of the conflict between analysts’ perceptions and investor behavior. It is a weekly chart of the CBOE put-call ratio (PCC) over the last 13 years. During that period of time, this index has only closed this low on three other occasions. Two of those were untimely peaks associated with the 2008-2009 financial market market crash. Analysts who reference those times and the current readings may now insist that things are going to end badly as a result.

However, a third such indication occurred near the beginning of the year in 2011. In the two months that followed, the markets lifted higher. Though 2011 had a lot of volatility, no one remembers it as the beginning of a crash. What this index actually indicates is not that a crash is coming, but that investors don’t feel the need to buy as many put options as they had previously. A simple thought about the current circumstances suggests why this might be so: things are less uncertain now than they were two months ago. Nevertheless, experienced chart watchers know they’ll need to keep an eye on how the indexes respond to the resistance inevitable as the S&P 500 reaches former highs.