Stocks may be ready for a face-ripping rally
This is encouraging news given the giant sell-off that occurred over the past two trading days with declines of over 600 and 250 points apiece in the Dow.
While this would appear discouraging, according to Nautilus Investment Research, the drop may actually be setting the market up for a face-ripping rally upwards.
"Historical aftermaths, we generalize, are mixed to Bullish for the near-term but with the only sure bet continued volatility," said a note from Tom Leveroni at Nautilius.
"For some perspective, the two most comparable periods to the >9% loss for global stocks (MSCI World ex-US, MXWOU) are the 1987 crash and the October 2008 financial crisis. Take note that the SPX rallied the day following those two declines by an average of 10% [small sample warning]."
Yes, this is just two instances, and as we've said before history may not be the best guide for future results, but in many cases it's the best we've got. Given that, the current trend indicates that stocks outside of the US could see some serious gains. For the US, the traditional move is similarly upward looking.
"Recent times the SPX fell > 5% in 2 days were also biased positively in the near-term if one could stomach the gut-wrenching volatility," said the note.
In fact, according to Leveroni, there have been 29 times that the S&P 500 has dropped more than 5% over a two day period since 1996. 19 of those times stocks ended the following day higher and 21 of those times stocks ended the month higher after such a drop.
So yes, it may look bad now, but history suggests that it could get a lot better soon as long as you hold on tight.
