Market Direction Mid Week Update

Market Direction: BULLISH alert issued 6/2/2016

The U.S. stock market’s ability to dodge big daily declines since calm reasserted itself following Britain’s June vote to leave the European Union might be little comfort for bulls, one Wall Street market watcher says.

As of Wednesday’s close, the S&P 500 index SPX, -0.01% logged 50 straight sessions without posting a daily decline of more than 1%. On Wednesday, the index declined less than 0.1% in choppy trade. For that matter, stocks have seen few big gains since notching record highs in July, which has left major indexes to witness some of the flattest trading on record.

Sam Stovall, U.S. equity strategist at S&P Global Market Intelligence, said the lack of any significant daily drops gives market bulls something else to be concerned about given September’s reputation as a rough month for equities.

The main U.S. stock benchmark historically tends to come under pressure if it goes for a long period without a daily drop of more than 1%:

The data indicates the S&P 500 “may need to drop before it can pop once again,” Stovall says.

The S&P 500 has seen an average price rise of 0.7% during every 20-day period since 1950, he notes. But after going at least 10 days without a one-day price drop of 1% or more, the market fell on average over the next 20 days. And when that streak extended to 50 days, he observed, the index fell in two-thirds of the subsequent 20-day periods, slipping 1.5% on average. 

The S&P’s longest streak without a drop of more than 1% ended on Oct. 8, 1963, after 154 days.

More recently, a 54-day streak ended on June 24, the day after the U.K.’s Brexit vote, when the S&P dropped 3.6%. The S&P fell another 1.8% the next trading day, marking a bottom. It bounced to new all-time highs in July, rising 2.9% in the 20 days after the referendum, according to FactSet data.

Stocks subsequently settled into a tight range. While downside moves have been limited, the S&P 500 hasn’t seen a gain of more than 1% since a 1.4% rise on June 30, either.

In fact, the Dow Jones Industrial Average DJIA, -0.06%  saw a high-to-low range of just 2.27% in the 40 days that ended Tuesday. That’s the tightest 40-day range in at least 100 years, Lyons wrote in a Wednesday blog post.

It’s a similar story for the S&P 500. The difference between the large-cap index’s highest and lowest daily closing price over the last 40 days has been just 1.75%, wrote analysts at Bespoke Investment Group in a Wednesday note. That’s the narrowest 40-day range going back to the beginning of the index in 1928:

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The all-time highs since our initial recommendation to go LONG this market. Here is how the markets have performed:

Stock Market Direction Recommendation (6/2/2016)
Dow	up 884.05 points a 4.95% gain	8/15/16
Nasdaq	up 316.25 points a 6.36% gain	9/7/16
S&P 500	up 88.55 points a 4.21% gain	8/15/16

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