What This Indicator Is Telling Me About The Market’s Next Move

Six months ago, the world was a different place. For one thing, children were in school. Now, many parents don’t know when their children will return to classrooms. They might not like the situation, but they understand it is part of the “new normal.”

Right now, the “new normal” defines much of my life — just like it does for many of you. Masks have become routine. So have shortages at the grocery store… difficulty getting appointments at many places… and Zoom meetings. It feels like everything is different.

But one thing is remarkably unchanged…

The S&P 500 is right where it was when this whole thing started.

At the bottom of the chart is the 100-day rate of change (ROC). I used 100 days in the calculation because that is how long it took for the market to recover its losses. (You can read more about ROC here.)

The recovery has been rapid, and I wanted to see if there are other times when the 100-day ROC topped 50%. There were only two prior instances, and both were near the bottom that formed after the 1929 crash.

There was no follow through after those bounces. The market remained in a trading range as the economy struggled through the Great Depression.

Both of the strong rallies were driven by news.

The first rally began in June 1932 when Franklin Delano Roosevelt was nominated. The theme of that convention was captured in the song, “Happy Days are Here Again.”

The second rally began in March 1933, the month FDR was inaugurated as President. His inaugural address included the famous line. “So, first of all, let me assert my firm belief that the only thing we have to fear is…fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”

What This Means Today

In these two examples, I believe there is some similarity with the current rally. This most recent rally was driven by hope that the worst of the coronavirus pandemic is behind us.

As an aside, I find it interesting that the day the market bottomed in March 2020, Demi Lovato’s “I Love Me” was ranked No. 1 on the Billboard digital song sales list. Some might say that lyrics including “I wonder when ‘I love me’ is enough” perfectly captures the moment. It’s not the same level of rhetoric as FDR’s “all we have to fear is fear itself,” but it can be argued that both quotes are appropriate for their time.

But back to the market analysis…

To find a larger sample size, I looked at all the times the 100-day ROC exceeded 40%. This is still rare, just 12 times since 1928. One month later, the S&P was up five times. The average gain on winning trades was 5.35%. Losing trades lost an average of 7.01%.

As a point of comparison, in an average four-week period, when the S&P 500 was up, the average gain was 3.71%. When there was a decline over that time, the average loss was 3.88%.

Based on history, we should expect a larger-than-average move over the next four weeks. The 100-day ROC tells us there is a slight bias to the downside, and this is confirmed by other indicators.

Now is an excellent time to be defensive. It’s also a good time to learn new strategies for navigating the market…

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