The S&P 500’s long winning streak – it spent 227 trading days within 5 per cent of all-time highs – has ended. Have the bears finally wrested control from the bulls, or is this likely to be a run-of-the-mill pullback in an ongoing bull market?
History suggests the latter is more likely. Sundial Capital Research found 10 previous instances where the index went more than 200 days without much of a pullback. What happened when those streaks ended? Bulls bought the dips – two months later, the index rebounded on all but one occasion.
September marked the first monthly decline in seven months. Again, there’s little to fear when long monthly winning streaks finally end – historically, subsequent returns “across almost all time frames were well above random”, says Sundial, “with a highly positive risk to reward ratio”.
Despite September's sell-off, 412 of the S&P 500's constituents are up this year. According to Bloomberg, there have been only five times since 2001 that more than 400 stocks were positive through September. Each time, the index added to its gains in the final quarter.
Similarly, previous years with many new highs – the S&P 500 had recorded 54 new highs by the end of September, the most since 1995 – typically enjoyed a strong fourth quarter, notes LPL Research's Ryan Detrick.
The conclusion: “Momentum does not die easily,” says Sundial, “as investors see their first real opportunity to get in after avoiding chasing stocks higher.”
