Stock Signal That Called the 2009 Bottom Just Flashed Again

After last week's bloodbath, some traders may forget that the U.S. stock market enjoyed its best start to a year since 2003. In fact, the S&P 500 Index (SPX) was up more than 10% in 2018 at its peak -- making the recent stock correction all the more rare. Here's how stocks tend to perform after a quick-and-dirty swing to start the year, and how short-term options traders can capitalize.

Signal Sounded Before the March 2009 Bottom

Specifically, Schaeffer's Senior Quantitative Analyst Rocky White looked at times when the S&P 500 was up at least 10% on the year, and then pulled back into negative year-to-date territory before March. The last time this happened was during the February 2016 stock market pullback. Prior to that, you'd have to go back to January 2009, just before what's now known as the March 2009 bottom.

After the last two signals of this kind, the SPX went on to rally through the rest of the year. Obviously 2009 ended up being a great year for stocks, with the index adding more than 32.3% to kick off the current bull market. And the S&P gained nearly 20% after the February 2016 signal, eventually adding 22.4% on the year.

Signals Precede Volatility, Big Gains for Stocks

Since 1932, there have been just 12 other signals of this kind. After such signals, the index outperformed -- a bullish sign for Wall Street in 2018 -- though volatility was greater than usual, as you can see by the Standard Deviation columns in the chart below. That's certainly been true so far for the stock market recently.

Specifically, a month after signals, the index was up 2.18%, on average, and was higher 66.7% of the time. That's compared to an average anytime one-month gain of 0.74%, with a win rate of 62.8%, looking at S&P data since 1932. Six months after a signal, the SPX was 9.48% higher, on average -- nearly double its average anytime six-month gain of 4.75%. Plus, the index was in the black 75% of the time, compared to 69.8% anytime.

One year after signals, the S&P was higher just 58.3% of the time -- lower than its 69.8% anytime win rate. However, the average gain of 8.78% is slightly better than usual, with the SPX gaining 7.68% for a typical year, on average. Not to mention that the post-signal average is dragged down by the rest-of-year returns in 2008, at the heart of the financial crisis.

Options bulls who think past might be precedent should heed the trading advice of Schaeffer's Senior V.P. of Research Todd Salamone: "If you are a premium seller, put sells and put credit spreads look attractive, as equity implied volatility is high, especially on shorter-dated options. Additionally, for many companies, the company-specific earnings event risk has gone away. If you are using call options to leverage stocks' upside, consider March expiration or after, as many weekly and standard February options are expensive, even with many companies recently reporting earnings."