11.03.2020 S&P 500 Analysis

11.03.2020 S&P 500 Analysis

With regards to Monday’s epic selloff, stocks could be on the verge of a large relief rally as the Fed prepares to slash interest rates. Firstly, history shows that bloody Mondays are followed by strong rebounds after six months. A Bloody or Black Monday occurred on Oct. 19, 1987, when the Dow Jones industrial average (DJIA) lost almost 22% in a single day. The event marked the beginning of a global stock market decline, and black Monday became one of the most notorious days in financial history. 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.

Historically, the S&P 500 shows to bounce back after a deep plunge on Mondays. Last Monday 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 black Mondays were followed by a surge of more than 11% over the next six months. In addition, the S&P 500 opened sharply higher on Tuesday but has since trimmed its gains down to around 0.8%.

Monday was “a major capitulation day, a term used to indicate the point in time when investors have decided to give up on trying to recapture lost gains as a result of falling stock prices. Hence 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. 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%.