Through all the news and volatility over the first six months of 2016, the S&P500 was up by the end of the first quarter and up again as we ended the second quarter. As of the beginning of the quarter, the market re-entered the old trading range from about S&P 2050 to 2120. The market stayed in this range from February all the way to August last year. This is important to note as this long sideways movement created a lot of resistance to moving higher. More on this in a minute.
Then came Brexit. The vote by the U.K to exit the European Union (Brexit) came as a shock on Friday June 24th simply because it went against expectations. The S&P500 closed on June 23rd within a decent trading day of a new high and the DJIA was up over 230 points betting on a stay vote. Traders and speculators had to unwind trades and find liquidity to cover margin calls creating a lot of short term volatility. This caused the market to drop about 5.5% in just two days. We posted comments on our website to remind our clients that this was an event and not a trend. We expected that patience would be rewarded and as of this writing, the DJIA has fully recovered from the Brexit carnage.
The statistics below may help prevent emotional decision making during short term event driven market corrections that test one’s resolve.
Since 1946 there have been 76 declines of 5-10%. The average time to fully recover was just one month. There have been 27 declines of 10-20% and the average time to full recovery was four months.
As we mentioned above, there has been a tremendous amount of upside resistance around S&P 2100 which is also just below the all-time market high. The chart below shows how many times the market has tried but failed to get significantly through this area.
From a technical standpoint, the longer a market stays in a narrow range, the bigger the move, up or down, once it finally breaks out. We witnessed this above when the market fell below the range in August last year and again, early this year. We believe the market will soon break above current resistance. We should see new highs in time and, the momentum established as we finally break above this significant resistance area could propel the market for a while. We remain intermediate to longer term bullish.
Stay tuned to our website for additional market commentary.