Pullback perspective

  • On Monday, SPX suffered biggest intraday sell-off since February
  • Pullback from September record high topped 5%
  • Index broke below previous pullback low for first time this year

Haven’t seen one of those in a while.

Even though the market had already been pulling back for two weeks (since September 2’s record high), yesterday’s sell-off had a different feel to it—which it should have, given it was the S&P 500’s (SPX) biggest intraday drop in seven months.

In falling 2.9% intraday, the SPX extended its current slide to -5.1%, which the following chart shows is the second-biggest pullback of the year—although, so far, it’s not much bigger than the index’s January and May downturns:

Chart 1: S&P 500 (SPX), 12/31/20–9/20/21. S&P 500 (SPX) price chart. Broke below Aug. low.

Source: Power E*TRADE (For illustrative purposes. Not a recommendation.)

One key characteristic of the current pullback is that yesterday’s move dropped the SPX below its previous (August) swing low—a development some traders may interpret as a break of this year’s uptrend. Until now, all of this year’s pullbacks had bottomed above the lows of the immediately preceding pullback.

From one perspective, every market move is unique. For example, the current down move has occurred in a market still monitoring COVID and inflation, and got an extra charge Monday from concerns that a potential debt default by Chinese property company Evergrande could reverberate throughout global financial markets.1 And it’s all unfolded during the market’s weakest season of the year.

From another vantage point, though, a pullback is a pullback is a pullback—markets drop for various reasons and, at some point, buyers re-enter the market. And it’s from this perspective that some traders attempt to gain some insight by looking at what the market has done after similar moves.

How much the SPX closed lower that day, though, appeared to play a role in its subsequent short-term performance.

For example, yesterday the SPX sold off more than 2% intraday, hit a two-month low in the process, and closed lower—something it’s done 251 other times since 1962. Overall, the market’s typical performance over the next trading days wasn’t bad: The SPX was higher 58% of the time, and had a median gain of 1.18%—both figures better than the index’s overall five-day medians of 56.3% and 0.3%, respectively.2

How much the SPX closed lower, though, appeared to play a role in its short-term performance. For example, when the index closed down between -2% and -3%, the next five days were slightly more bullish—the SPX rallied 59% of the time and had a median return of 1.21%.

But when the index closed down a little less—between -1.5% and -2.5%, as it did yesterday—subsequent returns were less bullish: The SPX was higher after five days only 54% of the time, with a median gain of 0.7%. Also, the market was more likely than not to close lower two and three days after the big down day.

The market may or may not be done pulling back, but long-time traders know a good way to develop a frame of reference for what’s happening now is to know what’s happened in similar situations in the past.

Today’s numbers include (all times ET): Housing Starts and Building Permits (8:30 a.m.), Q2 Current Account (8:30 a.m.).

Today’s earnings include: InnovAge (INNV).


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1 Barron’s. China Evergrande Is a Big Problem for the Market. These Charts Show Just How Big. 9/20/21.
2 All figure reflect S&P 500 (SPX) daily price data, December 1961–September 2020. Supporting document available upon request.

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