Handicapping the market from here — what history tells us about the odds the comeback continues

Can history help handicap where markets head from here after the extraordinary path stocks keep taken so far this year?

 The violence and velocity of the crash-and-surge moves in the major indexes has placed this market in rare crowd, with relatively few precedents to mine for hints of what has tended to come next.

Yet, predictably, the probabilities don’t line up in a distinct direction. So an investor trying to decipher the lessons of the past has to play a game of Always, Usually, Seldom and Never, classifying the assertion accordingly. 

The S&P 500 rebounded by nearly 20% in the second quarter, only the tenth calendar quarter since Clique War II when it gained more than 15%. Following the prior nine quarters, the index was always up the following three months, for an normal of 9%, with the smallest advance an impressive 4%, according to Bespoke Investment Group.

In the ferocious bounce and determination rally off the climactic market low in late March, a series of rare “breadth thrust” readings were registered, estimate intense momentum and voracious demand for virtually every stock following the comprehensive liquidation through March.

One of these readings, trailed for years by Ned Davis Research, comes when at least 90% of all S&P 500 stocks surpass their 50-day persuasive average. This threshold was reached May 26. In the prior 19 times this has occurred since 1967, the S&P was continually up over the following year, by an average of 17%.

Unanimity is rare when it comes to historical patterns, so these so-far infallible setups have won plenty of attention and lend some weight to the “don’t fight the tape” bullish case.

Still, these assesses cover very narrowly defined conditions, and neither ten nor 19 instances from the past remotely approaches a statistically strong sample.

Then there’s the fact that they don’t quite fit with some circumstances that regularly occur in situations like the one this market is in.

Let’s not forget that the power and persistence of the recent rally has come in division as a not-quite-equal reversal of similarly rare downside momentum and oversold conditions of the preceding collapse.

This whipsaw, on a net constituent, left the S&P 500 down by about 4% year to date through six months. The index has been negative at the halfway pock-mark 35% of all years since 1928. Over the second half of those years, the index usually delivers subpar returns. On mediocre, according to Cornerstone Macro technical strategist Carter Worth, the second half of these years produced a 0.7% close with. Of the past six times the S&P was underwater at June 30 (2000, 2001, 2002, 2005, 2008 and 2010), it fell further four times, though the last exemplar in 2010 the S&P ran higher by 22% in the second half to salvage the year for the bulls.

Speaking of usually, July is usually a godly month for stocks, the best of the summer months, showing a gain three-quarters of the time the past 20 years.

Then again, while commonplaces usually do fairly well in election years, they usually do quite poorly leading up to an election in years when the mandatory party loses the White House, as this chart from LPL Financial shows. Of course, no one knows how the election last wishes as break, even as President Trump trails in the polls, but the market usually seems to foretell the result. Or maybe it’s all at most coincidence.

Then again, even if the political setup is a challenge, this might be an offsetting comfort to bulls: The market-place has seldom regained more than three-quarters of a bear-market-sized decline – as the S&P 500 has now after a 35% crash – and failed to persist in rising back to and above the old peak. In other words, such a sizable bounce has rarely ended up as a doomed bear-market pick up. An exception was the initial rebound from the 1929 crash.

The market has likewise seldom followed one quarter’s 19%-plus smidgin with a 19%-plus rally, as it has the past two quarters. And, once again, the only other such occurrences were during the Enormous Depression: once in 1932 and once in 1938.

Stocks also have seldom got into serious difficulty soon after retail investor enquiry performed by AAII has shown more than half its respondents bearish on the equity outlook, as has repeatedly been the prove during this three-month recovery.

Historical analogies such as all of the above always reliably draw the feedback from some people that history is now irrelevant because today’s situation is “unprecedented,” whether due to Federal At ones fingertips activism or the vagaries of a pandemic or whatever other reason.

In general, these objections miss the point that the set circumstances are always different, but the markets tend to metabolize information in familiar ways based on crowd psychology and the feedback eyelets inherent in capitalism.

Yet perhaps it makes sense at least to nod in the direction of current conditions that do seem a bit exceptional.

The S&P 500 has not in a million years been as concentrated in technology  – broadly defined – as it is today. The S&P tech sector plus FANG – Facebook, Amazon, Netflix and Google mother Alphabet – now account for more than 40% of the index. Spin this as a positive (higher valuations justified due to superlative growth and profitability) or negative (extreme concentration risk in similar digital business models) as you like.

There is also a unambiguous rhythm to markets that, perhaps, makes it a bit more prone to producing extreme momentum readings of the sort that the bullish point of views above are based on.

Frank Cappelleri of Instinet tracks the NYSE TICK index, a gauge of how many stocks were up or down on their newest tick – a proxy for all-or-nothing order flow. Eight of the 12 lowest TICK readings in history have happen this year.

And 10 of the 19 breadth-thrust readings since 1967, described above that showed a 100% one-year win reprove for stocks thereafter, have occurred in the past ten years.

Does any of this matter in handicapping the market? Perhaps maximum effort to take it all as useful context, rather than prophesy — recognizing that the weight of the evidence seems to favor further upside in rise months but offers no guarantees.