The S&P 500 index surged last Friday by more than 13% from its June 16 low. While the S&P 500 remains in a bear market, still more than 20% below its Jan. 3 peak, the Dow is trading above the level that signals its exit from a market correction — a drop of 10% or more from a previous high. The Nasdaq Composite traded temporarily above a level that would signal an exit from the brutal bear market it is in. The Dow posted a small gain on Monday, while the S&P 500 and Nasdaq ended down 0.1%.
What has caught the eye of investors is the more than 7% rise in the S&P 500 over the past four weeks, which is a landmark on a large scale and “dangerously close to sparking interest, in a signal sense,” in the words of Jefferies strategists, including Andrew Greenbaum, in a comment on Sunday. A gain of just more than 8% over four weeks would mark two standard deviations in the average of the S&P 500’s gains, they noted, based on data they examined going back to 1990, meaning the market wouldn’t need “much more strength” to reach statistically significant territory. .
The analysts also noted that in the 17 times the S&P 500 has reached this level, the subsequent performance “looks massive,” in their words – an average of 9% over the next six months. But there is a notable caveat, as there were also some cases that showed double-digit negative returns. And when the previous six months were negative – as was the case this time – “the likelihood of positive returns drops steeply”, they wrote.
The bottom line, they said, is that “while the seemingly unstoppable bounce may lure people in, there’s still a good chance it’s just a rally in a bear market.”