History shows that, since 1929, when the S&P drops from at least a three-year high and then stays below the 200-day moving average for at least 30 trading sessions, it is often followed by strong returns for the benchmark index in the months and year ahead, said Jason Goepfert, senior research analyst at SentimenTrader.
The table above shows the large-cap S&P 500's performance following each time it cycled from at least a three-year high to holding at least 30 sessions below its 200-day moving average.
Since 1929, the S&P 500 has typically gained a median 4.1% in the three months after spending over 30 days below its 200-day moving average following a drop from a three-year high. The index has also registered a median double-digit returns over the following 12 months, according to data compiled by SentimenTrader.
To be sure, the S&P 500 did experience "tough times" with double-digit losses suffered over the following year, most notably in 2000 and 2008, Goepfert said in a Monday client note.
"But most of the time, of course, that did not happen. Even though its average return and risk/reward weren't impressive over any time frame, they were mostly positive from two months and beyond," he said. "Most cycles from new highs to 30 days below average soon recovered."
That's also why Goepfert challenged the common market belief that stock-market conditions must follow certain bearish patterns just because the S&P 500 remains below a technical threshold. "The idea that we're more likely to crash, or suffer a protracted bear market, simply because the most followed index in the world hasn't yet made it above its most widely-watched technical indicator, is mostly bunk," he said.
"A decent heuristic we've seen lately is that if stocks lose a further 3% to 5% following these patterns, something rotten is more likely to occur. The worst conditions tend to see near-immediate failures after such conditions, so that will be something to watch in the weeks ahead," Goepfert said.