What history tells us about the current market

Last night the Federal Reserve raised interest rates by 0.25% to a new target range between 0.75% and 1.00%. But equity markets focused more on what the Fed said next, alluding that it was not in a hurry to tighten monetary policy further than what they had already outlined.

US equities rallied as a result.

All the major indexes had gains between 0.5% and 1.5%, and the S&P 500 finished just 0.4% short of its record close.

Impressively, the S&P has gone 105 consecutive days without a decline of 1% or more, and the CBOE volatility index (VIX), in turn, is close to 10-year lows, at 11.63.

(Source: LPL Research, FactsSet)
(Source: Barchart.com)

What does this tell us about the future?

According to Ben Morris of Stansberry Research, the VIX has only stayed at or below 13 for this long 7 times since the index was created in 1990. While a sample size of 7 is far too low to draw any strong conclusions, in 6 out of those 7 times, the S&P performed poorly in the following 3 months, but positively in the following 6.

Except for one of the seven occurrences, the S&P 500’s one-, two-, and three-month returns were not good. There’s a clear negative bias… 

(The “Start Date” column marks the end of the second month with a VIX at or below 13… and is the start of the following periods.)”

Start Date1-Month2-Month3-Month6-Month12-Month
9/7/19930.5%-0.2%1.7%1.8%2.9%
2/2/1994-3.6%-7.0%-6.4%-4.9%-1.9%
7/29/2005-1.8%-1.4%-4.5%4.1%3.4%
1/6/2006-2.4%-1.0%0.8%-1.4%9.9%
4/13/20060.4%-4.6%-4.1%5.7%14.1%
11/10/20062.2%3.7%5.4%9.6%7.3%
7/15/2014-1.3%0.6%-5.0%2.5%6.8%
3/2/2017??????????
Average-0.9%-1.4%-1.7%2.5%6.1%
Median-1.3%-1.0%-4.1%2.5%6.8%
Up / Down3 / 42 / 53 / 45 / 26 / 1
(Source: Stansberry Research)

But the negative results are far from catastrophic with the largest pullback being 6.4% after 3 months.

On the other hand, Ryan Detrick from LPL Research analysed the last 10 times when the S&P 500 spent more than 100 days without a 1% drop. He found that the S&P’s one-, three- and six-month median and average returns were positive after the streak of 100 or more days ended. Here are his findings:

(Source: LPL Research)

After a streak of 100 or more days without a 1% drop has ended, the S&P 500 has been up a very impressive median return of 14.4% a year later and higher 75% of the time. In other words, a lack of big down days or a lack of volatility by itself isn’t a warning sign.

The big takeaway…

The bull market is highly likely to still be intact, but a pause here and possibly a small pull back should not be discounted in the short term.

If you want to learn how to invest in stocks and analyse the market to identify profitable and deadly turning points, contact United Global Capital today for a no cost, no obligation consultation on 03 8657 7640 or email [email protected] to learn more about Quality, Value, Trend (QVT) selection methodology.

For a small yearly fee, learn how to take advantage of the current bull market and stay ahead of the crowd, with access to market news, updates and 20-30 stock recommendations per year in the Australian and US markets!

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The information contained in this article is General in nature and has been prepared without taking into account your objectives, financial situation and needs.

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