The Best Time to Buy Stocks After This S&P Signal

The stock market recently wrapped up its worst two-week stretch in over a year. What's more, last week there were 315 new 52-week lows among all optionable equities, according to Schaeffer's Quantitative Analyst Chris Prybal -- a signal not seen in 18 months. Against this backdrop, we decided to take a closer look at the recent spike in new stock lows, and how the S&P 500 Index (SPX) tends to perform after these signals.

New Stock Lows Have Jumped 500% Since June

Last week's 315 new lows -- close to 10% of our subset of roughly 3,200 stocks -- marks the most since Feb. 12, 2016, when over 1,100 stocks fell to 12-month nadirs. In fact, the number of new lows has skyrocketed almost 500% just since June 30, when only 53 stocks touched 12-month lows. The four-week moving average of new highs/new lows touched 0.54 last week, marking the lowest since Nov. 11, just after the presidential election. 

Stocks Outperform 3-4 Months After Signal

Going back to 2015, there have been just 24 instances in which the number of new lows among optionable equities touched 300. The S&P 500 underperformed in the short term, losing an average of 0.5% and 0.3% one and two months after a signal, respectively. That's compared to an average anytime one- and two-month gain of 0.7% and 1.3%, respectively, going back to 2015. 

However, in the intermediate term, the SPX outperformed. Three months after a new-low signal, the index was up an average of 2.1%, compared to an average anytime gain of 1.8%. Four months out, the S&P was 2.8% higher, on average, compared to an average anytime gain of 2.3%. "Previous sell-offs caused the number of new lows to expand rapidly, creating an exhaustion phase of selling, which was ultimately greeted by opportunistic bulls," said Prybal.

Six months after a signal, though, the SPX was just 2.3% higher, on average, compared to an average anytime gain of 3.5%. It's also noteworthy that the percent positive after signals doesn't get above 67% -- at the four-month marker -- and is lower than average at each checkpoint below. Standard deviation is also higher than usual across the board, suggesting bigger-than-usual volatility.

The Sweet Spot for Bulls

In conclusion, if past is precedent, it looks like the sweet spot to scoop up stocks (or short-term call options) is about two months after a new-low signal -- which would be in mid-to-late October, this go-round. But investors should consider holding the shares for just a couple months -- or buying calls with just a couple months' shelf life -- since the SPX tends to underperform again six months after a signal. In this case, speculators would sell before the new year, or buy calls that expire in December.