What Happened Last Week Has Bulls Smiling

What a difference a week can make. Last Tuesday the S&P 500 Index closed at a new five-month low and there were many growing concerns. From China trade issues, to peak earnings, to slowing global growth, to a potential Federal Reserve policy mistake—the list added up to the worst month in nearly seven years for the S&P 500.

Well, extremely oversold markets can bounce, and did we ever see a rare bounce last week! In fact, the S&P 500 gained at least 1% on three consecutive days for the first time since right after the Brexit vote in June 2016. Turns out, markets making a new five-month low followed by three strong days in a row tend to continue climbing higher.

“Last week’s extreme market strength from oversold levels could be just what the bulls needed. We’ve had so much bad news lately, this could be the turning point,” explained LPL Senior Market Strategist Ryan Detrick.

As the LPL Chart of the Day shows, stocks have never been lower three months after the S&P 500  reached a five-month low and was then up 1% three days in a row. The returns 6 and 12 months later have been quite strong as well. In fact, the two times future returns were weak were during the recession of ‘73/’74 and the tech bubble recession. Non-recessionary environments have been rather strong, a good sign given we don’t anticipate a recession over the coming 12 months.

Source: LPL Research, FactSet 11/2/2018

Be on the lookout for our Weekly Market Commentary due out later today, where we will take a closer look at other reasons to expect a potential year-end rally. 

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