I enjoy exercising. I don’t see it as “work,” so much as a healthy release of pent-up energy, which I tend to acquire after sitting many hours at my desk.
Of course, like everybody, I’m not able to exercise every single day. And I’m not even sure that would be healthy. You can’t “be on” 100% of the time.
But like many things, I’ve learned there’s an important difference between a little rest… and too much rest. A two-day rest period allows for muscle repair and growth. A two-week rest period can lead to muscle deterioration (It’s a death sentence to motivation, too!).
I guess it’s the idea that “the dose makes the poison.”
Pondering this, I recently wondered the effect of “rest periods” during bull markets.
I think most reasonable investors understand that bull markets must go through rest periods from time to time. We call these rest periods “pullbacks,” “corrections” or “consolidations,” depending on their magnitudes and durations.
But there’s such a thing as a rest period that lasts too long… just as taking a three-month break from your exercise routine basically puts you back at square one (IF you have the motivation to begin again).
That was one hypothesis that I formed recently.
You see, the S&P 500 has now gone more than 130 days without registering a “bullish” reading on a popular technical indicator, the Relative Strength Index (RSI).
Short periods without a bullish reading are fairly common. And like taking a two-day break from your exercise routine, bullish investors tend to return from these rest periods with renewed spirit and energy… ready to buy and push prices higher.
I ran some research to show this…
The results revealed that after the S&P 500 has taken a 22-day “breather” … it goes on to return an average of 1.84% over the next two months… and 2.94% over the next three months. That’s a strong performance.
But when the market’s short breather turns into a prolonged period of laziness, subsequent performance isn’t so hot. Specifically, after the S&P 500 has taken a 110-day (five month) hibernation… it has then gone on to return a milder 1.16% over the next two months… and 1.75% over three months.
Take a look…
As you can see, stock market returns tend to be much higher after short rest periods than after long ones.
This is important to consider since the S&P has spent close to six calendar months in a “restful” state. To put it short, the bulls are getting out of shape!
It doesn’t mean the market will crash tomorrow… and it doesn’t mean we’re destined to suffer negative returns over the next two to three months.
It does mean you should cater to your more defensive instincts this summer. For my Cycle 9 Alert readers, I’ve equipped them with “correction protection” so we don’t lose out on the gains we’ve recently made or currently hold. Right now we have two positions up around 50%… even as the bears tug at our heels!
Adam O’Dell, CMT
Chief Investment Strategist, Dent Research