In the four trading days from the close on March 14th to the close on March 18th (Tuesday through Friday last week) the S&P 500 rallied 6.95%.
That’s a powerful move: Last week’s 6.95% return ranks 36th out of the 8,115 four-trading-day holding periods since 1989.
However, does a move of that magnitude mean the market has bottomed and is due for a significant rally?
As with so many things in the financial markets, the answer is mixed.
The average return for the 30 calendar days following the 50 largest four-day rallies in the index since 1989 is 2.382%, which is more than twice the rolling average four-day return for the index of 0.934%.
In addition, the S&P 500 was up 72% of the time one month following those “signals” compared to just 65.4% of the time for a randomly selected 4-trading day holding period since 1989.
So, that would seem to suggest last week’s powerful move means the market has bottomed and there’s significant upside to come.
However, there are three offsetting points:
First, out of the 50 largest four day rallies in history, 21 happened during bear markets in the S&P 500. In other words, these rallies marked a short-term countertrend bounce — a bear market rally — but the broader market had further to fall before reaching its ultimate low.
And, in a related point, 72% of these 50 large four-day rallies ocurred either during a longer-term bear market for the S&P 500, within one month of the start of a bear market or within one month following the low of a bear market.
Second, as I noted earlier, the S&P 500 traded higher in the one month following the 50 largest 4-day rallies since 1989 in 36 of 50 instances.
Looking ONLY at the 36 cases where the market saw positive returns following this signal, 24 of them (67%) ocurred during a bear market in the S&P 500 or within one month following the bottom of a bear market.
In other words, when this four-day rally signal has “worked” in the past, the market was generally a lot more oversold, and trading much farther below its peak, than is the case today. Last Monday, just before this powerful four-day rally, the S&P 500 was only down about 13% from its January highs compared to an average of 25% to 30% for the successful 36 such signals since 1989.
So, is the recent rally the beginning of a move to fresh all-time highs?
That’s certainly possible, however history suggests it’s more likely to be a short-term countertrend move within a longer-term down market. And the lack of a washout at the recent lows — a topic I covered in Where’s the Panic — adds further credence to that interpretation.
DISCLAIMER: This article is not investment advice and represents the opinions of its author, Elliott Gue. The Free Market Speculator is NOT a securities broker/dealer or an investment advisor. You are responsible for your own investment decisions. All information contained in our newsletters and posts should be independently verified with the companies mentioned, and readers should always conduct their own research and due diligence and consider obtaining professional advice before making any investment decision.