A Blast from the Past

Fri, Jun 5, 2020 - 4:06pm

Momentum, ladies and gentlemen—that is what we are seeing today. Less than 2 months ago we saw panic selling that drove the index down 35% intraday from peak to trough. Today, over 96% of the S&P 500’s members are now back above their 50-day simple moving average. Now I’m not one to linger on the past, but history does tend to be one of my favorite teachers so let’s look at the numbers, shall we?

Since 1990 the S&P 500 recorded more than 90% of its members with prices greater than their respective 50-day moving averages only 2.3% of the time. Don’t believe me? Feast your eyes on exhibit A (with appendix A for supporting detail of course).

Exhibit A – Source: Bloomberg, Financial Sense Wealth Management. Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

As my lovely assistant, Ms. Chart, shows above, the index typically exhibits these large thrusts of momentum before starting a prolonged bullish run. What has been the average return after these events? The S&P 500 has averaged a return of 14.21% over the next year with a positive hit rate of 99%! Is this time different? Perhaps. Perhaps the Fed’s printing and spending spree is akin to a pig and lipstick. Regardless, this is what our history teacher tells us to be fact.

S&P 500 Forward Returns When 90%+ Members Are Above Their 50D SMA
Forward Returns: 1 Day to 1 Year

Exhibit B – Source: Bloomberg, Financial Sense Wealth Management. Note: Past performance is no guarantee of future results. You cannot invest directly into an index.

The current momentum is a result of an overreaction to the downside. Previous angst and rapid selling gave way to global opportunities in various markets. Even with current indices nearing their former highs, the future looks bright. Our past shapes our future and our momentum carries us forward. Godspeed my investors.

APPENDIX A

Source: Bloomberg, Financial Sense Wealth Management. Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

About the Author

Associate Wealth Manager
Financial Sense® Wealth Management
ryan [dot] preiss [at] financialsense [dot] com ()
randomness