History shows that bloody Mondays are followed by strong rebounds after six months. A big rate cut could propel the S&P 500 higher.
The S&P 500 is down by over 17% from its all-time high. On Monday, the index plunged by 7% minutes after the open, which triggered the first trading halt since December 2008. It’s not surprising that extreme fear is driving the stock market.
The good news is that history is on the side of the bulls. Big down days on Mondays are often followed by a strong rebound as investors bargain hunt. On top of that, the market expects the Federal Reserve to cut rates all the way down to zero by next week.
Yesterday marked the tenth Monday plummet of over 5% since the S&P 500 went to a five-day trading week in 1952. In the previous nine big drops, the index rallied by an average of 4.2% the next day. Eight out of the nine bloody Mondays were followed by a surge of more than 11% over the next six months.
The S&P 500 opened sharply higher on Tuesday but has since trimmed its gains down to around 0.8%.
History tells us bloody Mondays can indicate that the stock market is close to the bottom. Andrew Thrasher, founder of Thrasher Analytics, shares this view. The analyst noted that Monday was “a major capitulation day.” He said,
From here, it would make sense to see another counter-trend rally, potentially back to 2,950-3,000 or as high as 3130. We’re now at a more attractive risk/reward point in time than any point since late-Dec 2018.
Billionaire hedge fund manager Will Meade also thinks that the bottom is in sight. He sees a massive rate cut from the Fed next week on top of a stimulus package from the White House.
On top of historical price action, the market is now expecting the Fed to cut rates by 1.0% to 1.25% Mar 18. That would bring the interest rate down to a range of 0% and 0.25%. Keep in mind, the Federal Reserve tends to give what the market wants when the probability is above 80%.
A big rate cut like this can ignite a stock market that’s desperately looking for bullish signals. It couldn’t have come at a better time as the S&P 500 is very likely carving a bottom.
The opinions expressed in this article do not necessarily reflect the views of CCN.com. The above should not be considered trading advice from CCN.com.