Market pivot

08/14/19
  • Market erased early losses after Tuesday tariff-delay announcement
  • S&P 500 banged out biggest intraday jump since January
  • Similar moves in past followed, on average, by near-term gains

What does a 1%-plus rally in the S&P 500 (SPX) index after two down days mean?

a. There was good news on the trade-war front.

b. Maybe nothing.

c. Better than average odds of near-term upside follow-through.

Well, if you answered “a, b, and c,” you can color yourself correct, although in terms of what happened yesterday, “a” is definitely true and “c” appears to be supported by the market’s historical record—potentially good news for recently beleaguered bulls, not to mention swing traders who have been playing the twists and turns of the trade story.

Yesterday’s easing of trade tensions—the US announced it would delay some duties on Chinese goods1—sent stocks soaring, especially tech and retail. After opening lower and looking as if it wanted to extend its most recent pullback to three days, the S&P 500 (SPX) jumped as much as 2.1% intraday and hit a six-day high:

S&P 500 (SPX), 6/26/19–8/13/19. S&P 500 (SPX) price chart. Bulls grab the reins.

Source: Power E*TRADE


Although the market eased off a bit from its highs, it was still the SPX’s biggest intraday rally since January 4—no small feat, especially given how meteorically the market rallied in June after the May downturn.

So, if you had any lingering doubts about the extent to which the trade story has been driving short-term market sentiment, yesterday was a good reason to end that internal debate. But it’s still wise to ask whether such a big move is a harbinger of more upside, or a reason to take long-side profits.

If we boil down what happened yesterday to its essence—a 1–2% gain and a six-day (or longer high) intraday high following two down days—we find the SPX has been in this position 287 other times since 1950. Here’s what it’s done, on average, each of the next five days:

S&P 500 daily returns after one-day upsurge pattern.

Source: Power E*TRADE


That’s four days of gains, with Day 3 (negative average return, and closing up only 48% of the time) representing a pullback in the middle.2 (A reason for swing-trading bulls to be patient?) These gains may seem modest, but given the SPX’s average daily return since 1950 is 0.03%, the fact that the returns for three of the four up days are larger than that shouldn’t be dismissed out of hand.

Overall, what we see is that after big up days like yesterday, the SPX has tended to keep its momentum to the upside over the next several days, if not necessarily maintain it at the same level.

Two weeks after days like yesterday, the SPX was higher 60.3% of the time.

That’s to be expected, though. Big up days are less likely to be followed immediately by several more big up days than they are by a temporary slow-down or give-back. The question is whether they imply more upside after that.

One possible signal: 10 trading days (two) weeks after days like yesterday, the SPX was higher 60.3% of the time, which is better than its long-term 58.7% probability of gaining ground in a 10-day period.2

But experienced traders also know to put such trading stats in the context of specific market conditions, which in this case may suggest that, barring renewed trade hostilities in the next several days (the “Maybe nothing” wild card from our quiz), there may be room for the bullish price-pattern implications shown here to play themselves out.

Market Mover Update: Tech was definitely the epicenter of yesterday’s stock surge. The Nasdaq 100 (NDX) rallied more than 2.5% intraday, while Cisco (CSCO), which releases earnings today, jumped nearly 3% at its peak.

Today’s numbers (all times ET): European Union Industrial Production (5 a.m.), Import and Export Prices (8:30 a.m.), Atlanta Fed Business Inflation Expectations (10 a.m.), EIA Petroleum Status Report (10:30 a.m.).

Today’s earnings include: Agilent Technologies (A), Luckin Coffee (LK), Progressive (PGR), Cisco Systems (CSCO), Dillard's (DDS), NetApp (NTAP), Macy's (M).

 

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1 Reuters. U.S. to delay China tariffs on some products, including laptops, cell phones. 8/13/19.

2 Supporting document available upon request.

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