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Charts: If History Is Our Guide, the S&P Will Hit Highs Again in Two Months


Consider this period an intermediate-term buying opportunity.

A couple of weeks ago, I took a look at how investors had priced very little "stress" into various markets. So little stress, in fact, that it was a new record.

When we see such all-is-well conditions, it tends to lead to not-so-well market performance. As the saying goes, "Risk happens fast."

It has certainly happened fast this time around as well. In the span of less than two weeks, the S&P 500 (INDEXSP:.INX) went from sitting within spitting distance of a 52-week high, to erasing the past 73 days' worth of gains. That's a quick adjustment in market perception.

But it's not all bad. The charts below show every time since 1928 that we saw a similar occurrence. Each of these dates highlight a period when the S&P went from closing at or very near a 52-week high, to closing at a 70-day (or more) low within two weeks.

We can see from the charts that this proved to be an intermediate-term buying opportunity every time. Three months later, the S&P was higher all eight times, averaging excellent gains of more than +8% on average. It took the S&P about two months to recover and close at a new high, with a further loss of an average -1.6% before doing so.

Clearly there was some shorter-term volatility a few times, but this is an intriguing look at how quick price shocks to a momentum market rarely lead to sustained selling pressure, at least over the next few months.

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