The S&P's rolling six-month return briefly exceeded 20% in late June
The April-June gains in the S&P 500 Index (SPX) weren't quite as "runaway" as those collected in the first calendar quarter of 2019, but the June snapback in the equities market -- which completely erased May's rout -- was sufficient to deliver a second consecutive positive quarter for stocks. What's more, on the heels of its early June bounce from firm support at 2,730, the S&P went on to set new record intraday and closing highs later in the month (edging past the previous peaks set as recently as May 2019 and September-October 2018).
While the benchmark U.S. equity index wrapped up the first half of 2019 with a year-to-date gain of 17.3%, Schaeffer's Quantitative Analyst Chris Prybal flagged a notable extreme in six-month S&P returns a few days before the second quarter "officially" concluded. As of Wednesday, June 26, the rolling six-month (126-day) return on the S&P hit 23.9%, marking just the 11th time since 2000 that this metric has exceeded the 23% threshold. With six-month S&P returns reaching such rarefied heights, are we due for a nasty mean reversion heading into the third quarter?
The short answer is no, not necessarily, based on Prybal's findings -- in fact, the S&P generally tends to outpace its average "at any time" returns over the short term after its rolling six-month historical return tops 23%, suggesting that "strength begets strength" in this scenario.
There's one weak spot at the 10-day mark after a signal, when the S&P's average return arrives at a loss of 0.3% -- considerably undershooting its "anytime" average return, a gain of 0.2%. Otherwise, though, the index's returns at our usual post-signal check-in points comfortably surpass its typical returns. At 42 days after a signal, for example, the S&P is up 1.6%, on average, compared to 0.8% anytime. And at 84 days and 126 days out, average returns are 4.7% and 4.5% following a signal, compared to 1.6% and 2.5% at any time since 2000.
But it's worth mentioning that when we look at Cboe Volatility Index (VIX) returns following one of these SPX outperformance signals, it seems that volatility spikes have been somewhat likelier than usual to take place over certain short-term time frames. Ten days after an S&P signal, the VIX is up 10.8% on average (60% positive), compared to an "anytime" return of 1.4% (46% positive) over this time frame. And 21 days after a signal, the average VIX return is 13.3% (70% positive), compared to the average anytime return of 2.4% (45% positive).
Aside from that blip, the VIX returns post-signal are fairly unremarkable. So, perhaps a crucial "headline" takeaway following one of these signals is that the VIX has been substantially likelier than usual to ramp higher in the month or so afterward -- a period, this time around, that encompasses the start of second-quarter earnings season, and the much-anticipated July Fed meeting.
For those curious, the last time the S&P's rolling six-month return topped 23%, it was on May 17, 2013. The index went on to underperform over the next month, but over the ensuing 42 days, the index's return clocked in at 1.3% -- better than the 0.8% "anytime" average return for this time frame, thought it slightly lagged the post-signal average of 1.6%.
As for the VIX, it was up 30.8% 10 days after that May 2013 signal, and the 21-day return expanded to 33.4% -- exceeding not only its "anytime" returns, but its bigger-than-usual average post-signal returns for these two "high-risk" time frames for a VIX spike, as well.
By the time the six-month mark rolled around on that most recent signal, though, VIX was down by 0.6% from where it had started -- considerably cooler than its average 126-day return of 6.0%, not to mention its mean post-signal return of 13.5% for the time frame -- while the S&P was up 7.4%, widely surpassing both its average post-signal and anytime returns.
Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, June 30.