Has the S&P Rallied Too Far, Too Fast?

This rare signal suggests otherwise

The S&P 500 Index (SPX) has been ripping higher since Christmas. In fact, it's up 15% over the last 50 trading days, which is the best 50-day return in more than seven years. The obvious question is whether 15% in 50 days is too far, too fast? In other words, are we due for a pullback, or some sort of pause? This week, I'll look at the past to see how stocks performed after similar price spikes.

What Happens After Strong Stock Market Rallies?

The table below lists the dates that the S&P 500 showed a 50-day return of at least 15%. The last time this occurred was in 2012. After that occurrence, the index did fine going forward, gaining about 4% over the next six months.

The time before that was 2010, and it looks like stocks did pull back over the next two weeks as the S&P 500 fell 2%. They quickly recovered, though, and in a big way, with the index gaining almost 10% six months after that signal. This table shows all 11 instances since 1990, and not one time was the market lower three months after a signal. These fast rallies don't seem to put the market at a heightened risk of a pullback.

Summarizing Fast S&P Rallies Since 1950

There were 25 instances before this one going back to 1950. The table below summarizes the returns going forward. These fast rallies have not tended to result in a pullback or even a pause. Rather, they indicate a strong market. The S&P 500 typically outperforms after these instances across all the time frames out to six months. A month after a signal, the index has been up 2% on average, with 84% of the returns positive. The typical one-month return for the index has been 0.71% since 1950, with 61% of the returns positive.