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The S&P 500 Just Did Something That's Only Happened 20 Times in 82 Years -- and It Has a 100% Success Rate in Predicting Which Direction Stocks Will Move Next.
The S&P 500(SNPINDEX: ^GSPC) includes the 500 largest companies in the U.S. and is the most widely followed benchmark of stock market activity in the country. Because it represents such a broad cross-section of American businesses, it's widely considered to be the most dependable gauge of overall stock market performance.
After spending more than two years squarely in rally mode, the storied index has fallen on hard times, driven lower by persistent inflation, the imposition of tariffs, and the burgeoning U.S. trade war with China. These factors have combined to create an environment rife with volatility. In fact, the U.S. stock market just notched its worst start to a Presidential term since 1928, according to Bespoke Investment Group.
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However, the S&P 500 just flashed a rare and important signal that suggests the tide could be turning.
Image source: Getty Images.
Fear running rampant
Given the uncertain backdrop, it's easy to understand why investors are nervous. Between Feb. 19 and April 8, the S&P 500 lost 19% of its value. The tech-centric Nasdaq Composite slipped briefly into bear market territory, slumping roughly 24%. The Dow Jones Industrial Average, the oldest stock market index in the U.S., fared slightly better, down about 16%.
The falling markets, combined with the aforementioned macroeconomic and geopolitical factors, had some investors running for cover, helping fuel the sell-off.
However, students of investing history will note that the stock market has just flashed a historic buy signal that suggests better times are ahead.
The breadth is palpable
A little background is in order. The market is made up of many stocks. Some move up, some move down, and some barely move at all. Getting the majority of them rising at the same time takes some doing, and the breadth we've seen in recent days has been something to behold.
In fact, in six of the past 10 days, we've seen 70% of the stocks in the New York Stock Exchange (NYSE) advancing. This signals that the worst could be over, according to Ryan Detrick, chief market strategist at financial services company Carson Group. While that might not seem like a big deal, consider this: Similar occurrences have happened just seven times over the past 75 years, and this marks the eighth.
Perhaps more importantly, on each of the previous occasions, it signaled that the market had already reached its bottom, and that market went on to substantial gains in the months that followed.
An even rarer signal occurred this week. Detrick points out that market moves in recent days have triggered a technical indicator known as the Zweig Breadth Thrust. This measures the number of advancing stocks compared to the number of declining ones over a 10-day period. This indicator was triggered on Thursday, April 24, marking only the 20th time it has flashed since 1943. The measure has predicted significant market gains over the coming six to 12 months with 100% accuracy. In fact, the S&P 500 returned 14.8% and 23.4%, on average, in the six months and 12 months that followed.
This seems to suggest that the worst may be behind us.
The small print
Does this mean the volatility is over? Not by a long shot. Note that the historical returns examples provided are six months and 12 months out. Furthermore, while the data suggests the worst is over, I wouldn't be surprised to see the broader market deliver a couple of head fakes over the coming weeks and months, and I expect the historic volatility we've seen to continue.
That said, with all the major indexes still (as of this writing) in correction territory, now is likely a great time to buy solid companies at discounted prices. Investors would also do well to remember that the greatest advantage we have is time, so buying stocks with the intention to hold for the long term is the best pathway to success.
Additionally, adding to your portfolio at regular intervals -- during good times and bad -- takes the guesswork out of investing and helps develop the discipline necessary to thrive no matter which direction the prevailing market winds are blowing.
History shows that the stock market has returned 10% annually, on average, over the past 50 years. This shows why investing for the long term is the surest path to success.
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Danny Vena has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
