Last week was quite the week for stocks, as the S&P 500 Index gained 6.2% for its best week of the year and best weekly gain since the week of the US election in early November 2020.
In the process there were some very positive signs for the bulls.
First up, a bad start to a year isn’t always a bad thing. In fact, on the 50th trading day of the year (Tuesday, March 15) the S&P 500 was down 10.6% for the year, for the sixth worst start to a year ever. “A bad start to a year isn’t a death sentence,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Actually, we’ve seen some enormous bounces in previous years after bad starts, with 2009 and 2020 some recent examples, so don’t lose hope yet.”
Looking at the five years to start off worse than 2022 shows that a potential big bounce is possible, with the rest of the year up nearly 25% on average, versus the average return of less than 7%. Yes, 2001 and 2008 both had numbers in the red the rest of the year, but those years were recessions, something we don’t see happening in 2022, although the risks for 2023 have increased recently.
As shown in the LPL Chart of the Day, the S&P 500 gained at least 1% on four consecutive days last week, a very rare occurrence indeed. “This was only the fifth time in history the S&P 500 gained at least 1% on four straight days,” explained Detrick. “And the good news is future returns have been spectacular, up more than 20% a year later every single time and up an average of 28.0%. In other words, blasts of strength like we saw last week aren’t the middle or the end of bullish moves; they are usually the beginning.” Anytime you can say the last two signals were in 1982 and the US election in November 2020 we don’t want to ignore it, as both of those times kicked off strong extended returns.
Lastly, volatility was quite high recently, but it has calmed down now, another bullish signal. Not surprisingly, investors were on edge due to a more hawkish Federal Reserve Bank, 40-year highs in inflation, and war in Eastern Europe. That brought with it a higher CBOE Volatility Index (VIX), with the VIX closing above the high water mark of 30 for 11 consecutive days. The rally last week saw a big drop in the VIX, as fears calmed.
Looking at previous times the VIX was above 30 for at least two weeks and then had a subsequent close back beneath 30 showed quite impressive future returns. The S&P 500 Index was higher a year later 11 out of 12 times with an average return of nearly 22%, something that could indeed have bulls smiling.
After the rough start to 2022, last week’s move higher was a nice change. By no means is this an all clear signal, but the action last week could be a clue that better times could be coming.
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