Friday’s stock market rally is impressive, but can it last?
The past nine months of market activity have seen the S&P 500 rise 23.5 per cent from its October lows – and within that period the U.S. benchmark index has posted rallies of 2 per cent or more on nine occasions (not including this latest rally).
We took a look at those nine previous rallies to find out what the S&P 500 did on the next five trading days. Overall, the index fared well – but in most cases, the rally subsided dramatically.
The S&P 500 posted a positive return 78 per cent of the time, in the five days following a rally of 2 per cent or more. On average though, the index rose just 1 per cent over the course of those trading days. On two occasions, the index was nearly flat, and on two others it fell 1.8 per cent and 3.8 per cent. The best echo-rally was the 6.4 per cent gain in early October.
What’s interesting is that Friday’s rally comes with the S&P 500 beginning the day at its highest starting point for a rally of 2 per cent over this sample period. Can the rally continue with the index at such relative heights?
If you rank the five-day subsequent moves by where the S&P 500 started, you can see an ugly pattern: The higher the S&P 500 is at the start of the one-day rally, the weaker the reaction in the following five days.
For example, the S&P 500 rallied 2.3 per cent on June 6 when the S&P 500 was at 1315; it then went nowhere for the next five days. The index was also relatively high following rallies on October 27 and November 11: It retreated in the following five trading days on both occasions.
Conversely, the index has seen its biggest follow-through rallies when it has started at lower levels. In early October, it rose 6.4 per cent in the five days following a 2.3 per cent one-day jump – but the index sat at just 1124 at the time.