At the close of trading on April 8, many of the US equity market benchmarks posted their steepest declines during this nearly two-month long selloff. The S&P 500 was deep in correction territory, off nearly 19%. Even though more is needed for an all-clear market condition, green shoots have begun to appear, advises Sam Stovall, chief investment strategist at CFRA Research.
Investors’ fears were fanned by the financial media asking such ominous questions as: “How far would the S&P 500 need to fall to equal the median P/E ratio at the start of recessions since WWII?” (45% was the answer).
Yet with the registration of a 90% Downside Day on April 4, followed by a 90% Upside Day on April 9 (where 90% of points and volume were attributed to buyers or sellers), the process of potential supply exhaustion and demand restoration may be underway, according to Lowry Research, a CFRA technical analysis business.
In addition to Lowry’s exhaustion/restoration readings, the percentage of the 155 sub-industries in the S&P 1,500 that were still above both their 50-and 200-day moving averages hit rock bottom on April 8 at only 1%.
What’s more, the percentage of groups trading above their 10-week and 40-week averages also closed below or near traditionally oversold levels. As a result, if the lows were set last week, history reminds us that the three worst-performing sectors and 10 deepest-declining sub-industries during the selloff tend to rebound the most in the following 12 months, outpacing the S&P 500’s average 34% rise with gains of 43% and 61%, respectively.
Should history repeat, and there’s no guarantee it will, the communication services, consumer discretionary, and information technology sectors should be outperformers, along with the 10 sub-industries that experienced the deepest declines.
