On September 18, the S&P 500 set its 79th closing high for this bull market. It quickly slipped into a panic-induced sell-off that shaved off 7.4% of its value. Since then, the market recovered more than 80% of what it lost, in a gap-filled surge that would make any prosthodontist salivate.
It’s too soon to officially call this decline a pullback (5%-10%), since it has yet to recover all that it lost. But if we find that this sell-off is indeed over, then the S&P 500 just went through a textbook pullback, as it took less than a month to materialize and the sell-off gave back a shade more than the average of 7%. What’s more, if it is truly a pullback, the S&P 500 will likely get back to breakeven in fewer than two months. Indeed, each of the past two pullbacks took less than half that time to recover fully. Therefore, don’t be surprised if the S&P 500 starts setting new, all-time highs by Thanksgiving. Finally, after reaching breakeven, the “500” climbed an average 8% in the subsequent three months before slipping into another decline of 5% or more.
One reason for this optimism is seasonality. As I was first taught by The Stock Trader’s Almanac, the market’s best performance has historically been in the November through April (N-A) period. Indeed, since WWII, the S&P 500 gained an average 7.0% in price in these six months, versus only 1.4% from May through October. Yet this seasonality is even more pronounced following mid-term elections, as the “500” jumped an average 15.3% from N-A and rose in price 94% of the time. And if this hefty average six-month return isn’t enough to encourage investors, consider that in the 12-month period (October through October) following mid-term election years since 1946, the S&P 500 gained in price 17 of 17 times, recording an average advance of 17.5%.
Of course, past performance is no guarantee of future results. In addition, many seasonality skeptics require a little fundamental backing to be convinced that the S&P 500 has the ability to advance so strongly, not only in the next six months, but also through the end of 2015. The “Rule of 20” indicates that by the end of 2015, based on a 2% inflation rate and $129 in operating EPS, the S&P 500 could trade more than 17% above its closing level on October 24.
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