The SPX tends to bottom out after such sharp, consecutive losses
The S&P 500 Index (SPX) fell by over 1% a week ago today. The next three trading days (Thursday through Monday), the index fell by over 2% each day. Selling pressure so brutal, sustained for days, is rare. This week I’m looking at what streaks of big losses has meant in the past. I wanted to see which is more likely: a sharp V-shape reversal to the upside or if the sustained selling pressure tends to be a precursor for huge losses.
Four Straight 1% Losses
In the 1930s, during the Great Depression, there were 14 streaks in which the S&P 500 fell by 1% or more four days in a row. Since those outlier times, occurrences have been less frequent. Since after the Depression until this recent occurrence, there have been ten such streaks. The table below summarizes how the S&P 500 performed immediately after those streaks. The second table is for comparison showing typical index returns since 1962, the year of the first streak.
These streaks have tended to be the culmination of selling. Stocks tended to outperform after these streaks. Three months after these streaks of big losses, the S&P 500 was up on average by double-digits with 78% of the returns positive. The typical three-month return for the index has been about 2% with about 66% of the returns positive. The outperformance is noticeable in the short-term and the longer term, out to six months.
This next table shows the day of the individual instances. The last streak happened around Christmas of 2018 and stocks immediately rallied, gaining 5% the very next trading day and gaining 24% over the next six months. This recent occurrence was just the third time that stocks fell the next day after four straight 1% losses. The other two times were split, with one time occurring in October 2008, just before the financial crisis then the second time was in March 2009 as the S&P 500 was near the bottom of that crash.
Three Straight 2% Losses
Yesterday ended the streak of 2% losses as well. This streak was less common with just four prior occurrences. The last three occurrences marked bottoms in the S&P 500, which went on to gain over 4% over the next week and over 7% over the next three months. After the last two occurrences, however, stocks reversed after those three months and six months after the streak, the index was up less than 2%.
The first occurrence in that last table is the most interesting. Friday, October 16, 1987, marked the third straight day of 2% losses. The S&P 500 fell by 5% that day (it also marked the first 100-point loss for the Dow ever). What is interesting is the very next trading was Black Monday. That is the day the S&P 500 suffered its biggest single-day loss in the history of the index. Stocks fell 20% on that one day. So with a little context, yesterday's 0.38% haircut isn’t so bad.