The S&P 500 (SPY) has vacillated widely over the past several weeks. In fact, one week ago the major market benchmark suffered its worst one day drop in over 100 days. But, that seems like a distant memory after Wednesday’s advance – the largest one-day gain in more than 100 days.
Through all of the crazy volatility the S&P 500 still managed to hold its important long-term trend line: the 200-day moving average.
This type of volatility often occurs during bearish cycles, however it is rare during bull markets.
According to Jason Goepfert of Sentimentrader.com, there have been 20 other occurrences since 1928 where the S&P 500 experienced its worst day in 100 days followed by its worst day in over 100 days less than a week later.
How did the S&P 500 perform after such volatile times?
“Over the next six months, the average drawdown (maximum loss) suffered by the S&P was -2.9%. That contrasts with an average maximum gain at its best point of +8.5%.”
What does this all mean?
It means that over the next six months the risk-reward is essentially 2-to-1.
Conclusion: the price action that we have witnessed lately typically means “intermediate-term gains for stocks”…but when the norm fails it “has preceded some of the worst pain in history”.
Food for thought.
Editor and Chief Options Strategist