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S & P 500 Returns Following Declines of Between 14% and 16% Within 60 Days

|Includes: SPDR S&P 500 Trust ETF (SPY)
The S&P 500 has declined about 15% from its most recent peak on April 26th 2010 till May 25th’s intraday bottom. A 15% loss in 29 days is steep and it has rattled investors and traders alike. There are some high profile market participants calling for a market crash, and others such as Barton Biggs, who are betting on a market bounce higher. Even Marc Mobius, the legendary emerging markets Templeton Fund manager, has weighed in saying that he has increased his bet on the BRICs (Brazil, Russia, India and China). 
 
As I thought about the US market’s next move, I wondered how many other times has the S&P 500 similarly declined. I decided to closely examine historical data to see if it could lead to any clues. This is an exercise that quantitative analysts often use when creating formulas that guide their trading programs. It can be helpful but should not be solely relied upon since historical patterns are not infallible and should be looked at alongside other criteria when placing a trade. One of the reasons the financial meltdown occurred is that too many people relied on historical trends that were not repeated. Market participants should place trades when the odds are favorable but even those trades sometimes fail.

The current decline was around 15% within a 30 day period, so I decided to look at S&P 500 declines of between 14% and 16% in less than 60 days. There were 12 periods that met these standards (including the current period). On average when a decline of between 14% and 16% took place within a two month period, it took about 42 days to be completed. Looking further at the data, a market participant would want to know what happens in the periods after such corrections. I then looked at the 1 month, 3 month, 6 month and 1 year periods that followed these 11 past corrections.

One month after, the S&P 500 on average was up 1.21% and was up 8 times and down 3 times. Three months after, the S &P 500 on average was up 1.53%, and was up 8 times and down 3 times. 6 months later the S&P 500 was up on average 1.70%, and was up 5 times and down 6 times. One year after the correction, the S & P 500 on average was up 19.06% and was up 6 times and down 5 times.
 
Looking closely at these statistics, the very three most recent periods in 2008 and 2009 held back the percentage gains significantly. If the current correction turns into the 3 most similar periods, then the S & P 500 could be in for some tough times over the next 12 months. If it turns into a correction that is similar to the other 8 periods, then the S &P 500 may perform better over the next 12 months. It may fit into neither of these periods as well and perform differently. Market participants should be prepared for all of the variations. Please see below for full stats.

Authored by Tom Henderson, Strategist JBH Capital.



Date
High
Date
Low
% Decline
# Days
Start
Price
End
Price
4/26/2010
1,219.80
5/25/2010
1,040.78
-14.68
29
1/6/2009
943.85
1/21/2009
804.30
-14.79
15
8/11/2008
1,313.15
9/29/2008
1,106.42
-15.74
49
6/5/2008
1,404.05
7/15/2008
1,200.44
-14.50
40
9/1/2000
1,530.09
10/18/2000
1,305.79
-14.66
47
9/11/1978
108.05
10/30/1978
91.65
-15.18
49
7/15/1975
96.58
8/21/1975
82.21
-14.88
37
6/7/1974
93.76
7/31/1974
78.96
-15.78
54
10/12/1973
112.82
11/27/1973
94.88
-15.90
46
6/2/1969
103.75
7/30/1969
88.04
-15.14
58
9/3/1957
45.44
10/22/1957
38.98
-14.22
49
6/12/1950
19.40
7/17/1950
16.68
-14.02
35

Average
-14.96
42.33

lower range days
15

upper range days
58



 
 
1 month later
Price
% ch
3 months later
Price
% ch
6/24/2010
-
-
8/23/2010
-
-
2/20/2009
770.05
-4.26
4/21/2009
850.08
5.69
10/29/2008
930.09
-15.94
12/28/2008
869.42
-21.42
8/14/2008
1292.93
7.70
10/13/2008
998.01
-16.86
11/17/2000
1349.97
3.38
1/16/2001
1326.65
1.60
11/29/1978
93.75
2.29
1/28/1979
101.55
10.80
9/20/1975
85.07
3.48
11/19/1975
89.98
9.45
8/30/1974
72.15
-8.62
10/29/1974
72.83
-7.76
12/27/1973
97.74
3.01
2/25/1974
95.03
0.16
8/29/1969
95.51
8.48
10/28/1969
97.66
10.93
11/21/1957
40.48
3.85
1/20/1958
41.35
6.08
8/16/1950
18.34
9.95
10/15/1950
19.71
18.17

                       
avg %
1.21
avg %
1.53
Lower
range %
-15.94

Lower range %
-21.42
Upper
range %
8.48

Upper range %
18.17

periods
3 down
periods
3 down

periods
8 up
periods
8 up



 
6 Months later
Price
% ch
1 Year later
Price
% ch
11/23/2010
-
-
5/25/2011
-
-
7/22/2009
954.07
18.62
1/21/2010
1116.48
38.81
3/30/2009
787.53
-28.82
9/29/2009
1060.61
-4.14
1/13/2009
871.79
-27.38
7/15/2009
932.68
-22.31
4/18/2001
1238.16
-5.18
10/18/2001
1068.61
-18.16
4/30/1979
101.76
11.03
10/30/1979
102.67
12.02
2/19/1976
101.41
23.35
8/20/1976
102.37
24.52
1/29/1975
77.26
-2.15
7/31/1975
88.75
12.40
5/28/1974
88.37
-6.86
11/27/1974
69.94
-26.29
1/28/1970
86.79
-1.42
7/30/1970
78.07
-11.32
4/22/1958
42.8
9.80
10/22/1958
51.07
31.02
1/15/1951
21.3
27.70
7/17/1951
45.55
173.08

avg %
1.70
avg %
19.06

Lower range %
-28.82
Lower range %
-26.29

Upper range %
27.7
Upper range %
173.08

periods
5 down
periods
5 down

periods
6 up
periods
6 up


Disclosure: Minor Short, minor long exposure.