First impressions, market deceptions

  • S&P 500 surrendered 1.7% gain Monday to close lower
  • It’s made similar moves only 41 other times since 2001
  • Market’s short-term reaction runs contrary to expectations

Coming out of a week when the S&P 500 (SPX) fell back into bear-market territory, Monday’s initial rally—the SPX climbed more than 1.7%—had to be a welcome sight for most investors.

The good vibes turned out to be short-lived, though, as the index gave up its sizable gain before too long, eventually slipping into the red:

Chart 1: S&P 500 (SPX), 6/16/22–9/27/22. Gave up large intraday gain.

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

Considering that intraday retreat set a new year-to-date low by puncturing the implied support of the index’s June lows—the summer rally’s launch pad—it may have been an especially discouraging turn of events for bulls.

But impressions of what the market is doing in real-time don’t always mesh with reality. Giving up a larger-than-average intraday gain and closing in the red certainly doesn’t sound like a bullish development, but when it’s happened other times, the market’s short-term response has been, more often than not, to bounce.

Since November 2001, the SPX has rallied 1.5% or more intraday and reversed to close lower only 41 other times—in itself, an indication of how unusual Monday’s price action was. (It’s happened four other days this year—January 20, January 26, January 27, and March 8.) The next day was more or less a coin toss, with the SPX closing higher 21 times and lower 20 times. After five days, though, the index’s typical move was much different:

1. the SPX was higher 63% of the time (26 out of 41 times).
2. its average return was 1%.1

By comparison, the SPX has gained ground in only 58% of all five-day periods since November 2001, with an average return of 0.15%. In other words, after days like Monday, you would be fighting the historical odds by assuming the market would be lower five days later.

While that doesn’t mean the market will follow that short-term bullish tendency this time, it does show the potential dangers of jumping to conclusions about a price move that “looks” or “feels” bullish or bearish when it’s happening.

Market Mover Update: One stock that did a better job than many of holding up during Monday’s reversal was Advance Auto Parts (AAP). Like the SPX, it pulled back significantly from its intraday highs, but unlike the SPX, it remained in the green for the day.

But AAP also appeared on multiple scans for unusual call options activity, thanks to 1,600 contracts changing hands in the October $170 calls—a strike price roughly $12 above where the stock was trading Monday afternoon:

Chart 2: Advanced Auto Parts (AAP) October call options, 9/27/22. New positions in above-the-market calls.

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

Today’s numbers include (all times ET): Cintas (CTAS), Paychex (PAYX), Thor Industries (THO).

Today’s earnings include: Mortgage Applications (7 a.m.), Advance International Trade in Goods (8:30 a.m.), Advance Wholesale and Retail Inventories (8:30 a.m.), Pending Home Sales Index (10 a.m.), Jerome Powell Speaks (10:15 a.m.), EIA Petroleum Status Report (10:30 a.m.).


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1 Reflects S&P 500 (SPX) daily price data, 11/1/01–9/27/22. Supporting document available upon request.

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