Be careful out there. The S&P 500 plunged 12% in the second quarter and took many exchange traded funds (ETFs) down with it. Now the question is whether investors have the nerve to buy on dives.
According to an S&P analysis of prices going back to the Great Crash of 1929, stocks tend to climb in quarters following big declines, and this trend can model the markets similar to a rubber band. Here are some observations from S&P Chief Strategist Sam Stovall after finishing his analysis on Friday:
- Good follows bad seven out of 10 times. Since Calvin Coolidge was president in the 1920s, stocks have fallen 5% or more in 41 quarters. But that was followed by stock rises over the next three months 29 times — or seven out or 10 times.
- Rises anticipate recoveries. It is said the stock market looks six months or more in the future, and the S&P data bears this out. Some of the biggest rises come before economic recoveries when unemployment is still high and growth low. Stocks also anticipate recession. That raises the prospect that the current drop could be signaling a feared double-dip, or back-to-back recessions. [How to Beat the Herd Mentality.]
If you’re thinking of buying now, though, there’s something else in the data: Sometimes those sharp rebounds are followed by sharp falls. Use caution.
Trendless markets are among the most challenging environments for trend following ETF investors. How can you cope with it? The answer isn’t in altering your strategy just because of some short-term trouble, but instead, sticking to it. That’s because at some point, this trendless market will come to an end the question of “what do I do now” will be answered – one way or another. [How to Follow Trends.]
If you want to be alerted when the markets hit certain key crossover points, consider becoming a premium ETF Trends member and signing up for our alerts! You can be alerted to key trading signals so you never again miss an opportunity. Read what’s it’s all about here. To try it out, sign up for a totally free seven-day trial here!
For more stories about trend following, visit our trend following category.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.