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Low Volatility Streak Ends at 102 Days – What’s Next?

Yesterday the S&P 500 daily streak without a greater than 1.5% daily loss came to end. What happens next? Expanding on our initial research we present the S&P 500 performance during the following three days after the last 42 “big down days” since 1950.

Historically the following day has essentially been a coin toss, up slightly more than half the time with an average gain of just 0.001%. The second day after is modestly more bullish, but still not overwhelmingly so, up 54.8% of the time with an average gain of 54.8%. The third day after has been bearish, down 59.5% of the time with an average loss of 0.19%. In the near term, it appears the S&P 500 tends to bounce around while trader and investors digest the full impacts to the catalyst that triggered the “big down day.” This time it was the Fed clearly stating that rates will be higher for longer and are likely to go higher yet.

Expanding the timeframe does not improve the near-term outlook. In the following monster table, performance on the “big down day” and to the subsequent low sometime during the next 90 calendar days have been added. “Big down day” losses are now excluded from the performance 1-week, 2-weeks, 1-month, and 3-months after.

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Over the following 90 calendar days, the low on the “big down day’ was breached 88.1% of the time. Only five times did the S&P 500 not make a lower low, 1961, 1963, 1965, 1968 and 2017. The average decline was 5.44%. The lower low arrived within 2 weeks, 14 times, and took more than 2 weeks 23 times. This suggests the quicker the S&P 500 can shake off its current concerns, the better, but if they persist then more volatility and chop is likely along with sideways to lower trading.

We still anticipate additional weakness through September and potentially into October. September-Octoberphobia combined with inflation and rate fears is likely to trigger further market weakness over the next month or so. The potential for another federal government shutdown is also rising and could weigh on the market. We do, however, expect this weakness to be temporary, in the minor correction range of 5-10% from recent highs in July/early-August. And this should set up our perennial pre-election year Q4 rally and a solid “Best Months” Seasonal MACD Buy Signal.

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