History Says Don't Sweat the Recent Pullback

Monday's sell-off was in line with the norm, if this signal is any indicator

After a brutal October, U.S. stocks kicked off November with a bang. Specifically, the S&P 500 Index (SPX) enjoyed two straight weekly gains of at least 2% -- something we haven't seen in more than three years. Below, we take a look at what these signals could mean for both the stock index and Wall Street's "fear barometer," if history is any indicator.

Since 2003, there have been just 11 times where the SPX enjoyed back-to-back weekly gains of 2%, the last occurring in February 2015. Prior to that, you'd have to go back to October 2014, which was the first signal of its kind in two years. Most of the signals (four, to be specific) happened in 2009, after the March bottom, per data from Schaeffer's Quantitative Analyst Chris Prybal.

One day after signals, the SPX was down 0.4%, on average, and higher just 36% of the time. That includes yesterday's 2% drop. However, one and two weeks after signals, the index was up 0.7%, on average -- far exceeding its average anytime returns of 0.2% and 0.3%, respectively, looking at S&P data since 2000.

In fact, the SPX was up by more than usual at each checkpoint after signals, including an average gain of 8.6% six months later --double the norm -- with a 90% positive rate. The average 12-month gain of 12.6% is also stronger than usual. From three months out, the index was in the black 90% of the time after two straight weekly gains of at least 2%.

The Cboe Volatility Index (VIX) -- also known as the stock market's "fear barometer" -- tends to drop after back-to-back 2% weekly gains for the S&P, in the long term, at least. While the VIX tends to jump a day after signals -- and it followed suit yesterday -- it averaged a loss at every checkpoint beyond that.

In conclusion, it hasn't been uncommon for the S&P 500 to struggle the day after posting consecutive weekly gains of 2% or more, so Monday's sell-off -- and the VIX spike -- was in line with the norm. From a longer-term standpoint, history indicates strength should beget strength for stocks, with the index outperforming its anytime returns one week to one year after signals.