U.S. Stocks Just Fell ‘Too Far, Too Fast’
Investors were just starting to get bullish again…
U.S. stocks staged an unbelievable rally from their October 2023 low to their recent high in March. The S&P 500 Index was up an incredible 28% in five months.
Then, the past month put that optimism to bed…
The Wall of Worry is back at the forefront of investors’ minds. And it’s out in full force.
Stocks have dropped as much as 5% from last month’s high. Concerns over higher interest rates, hotter-than-expected inflation, and renewed worries about global conflicts have everyone wondering if this is the start of a larger decline.
The fall so far wasn’t much. But it’s already extreme based on one measure. According to history, though, that means we’re likely past the worst… And we could see 14% upside over the next year.
Let me explain…
A 5% decline is hardly worth mentioning. But the fact that it has brought bearishness out of the woodwork is telling.
More important, the worst is likely over already. We can see this based on the relative strength index (“RSI”) for the S&P 500.
The RSI looks at recent price action and determines if an asset has gone too far, too fast in either direction. RSI readings range from 0 to 100.
A reading of 70 or higher is considered “overbought.” In that case, the asset is running hot, and we should expect prices to fall. On the other end, a reading of 30 or less means the asset is “oversold.” That’s a sign that the selling has gone too far… And prices tend to recover after hitting those levels.
We haven’t hit a reading below 30 yet. But the S&P 500’s RSI fell as low as 31.3 recently. Take a look…
Stocks have nosedived in recent weeks. They went from rising almost every day to falling almost every day. As a result, the RSI dropped to its lowest level since late last year. And it was down far enough to say one thing…
The recent sell-off has gone too far, too fast. And a rebound is likely from here.
History shows the pattern at work. To see it, I looked at each new RSI reading of 31.3 or lower over the past 15 years.
That low has happened 14 other times, or roughly once a year. And if you had bought at those moments, you would have done darn well in the months ahead. Check it out…
The past 15 years have been an incredible time for investors. Starting near the 2009 bottom, the S&P 500 has since risen 12.7% per year. But you could have done even better buying when stocks hit oversold levels like today’s…
Similar setups led to 8.6% gains in six months and 13.8% gains in the next year. Plus, stocks were higher a year later 92% of the time… So the odds of future profits are firmly in our favor right now.
This is a tough pill to swallow when stocks are falling for the first time in a while. But if your reaction is to look for reasons to sell, just remember… that’s the Wall of Worry in action.
Nothing has changed in the past month. History shows that staying bullish is the best move. And with stocks falling too far, too fast, a recovery is likely in the months ahead.
Best of all, that recovery already appears to be underway. Stocks made a strong rebound last week. And we can expect that to continue in the months to come.
Good investing,
Brett Eversole
This article was originally published on this site