A Down May - Should We Look For A Rebound?

The S&P 500 was down 3.09% for the month of May.  This was the worst month for the Index since June 2004 when it dropped 3.43%.  Going back to 1960, we found 64 months where the Index was down between 2% and 4%.  The average monthly performance following these months with similar declines was +1.67%, about a full percentage point better than the average gain (+.65%) for every month since 1960.

Comments

[Barry Ritholtz]

Very interesting stuff --

Can you place that into contexts of secular Bull and Bear markets?

i.e., Compare and contrast the 1966-82 period with 1982-2000.

[Mike]

We took a look at the same topic -- rebound months following months with around a 3 percent drop in the S&P 500 -- in the context of the time periods you mentioned: the secular Bear of about Feb '66 to July '82 and the secular Bull of about August '82 to August of 2000.

During the 66-82 Bear, the Index averaged a .17% increase per month. (Remember the overall monthly average for the Index from all of 1960 to 2006 was +.65%). In months following a monthly decline between 2 and 4%, the average jumps up to +1.14% -- worse than the overall +1.67%, but still a rebound nonetheless. Considering the Bear market environment, this might say something about the constancy of regression to the mean.

During the secular Bull period of 1982 to 2000, the results were predictibly more, well, bullish. During these years, the S&P averaged gains of 1.32% per month, about double the overall average from '60 to '06. When responding to a monthly decline between 2 and 4%, the Index averaged +2.28% per month -- exactly double the rate seen during the Bear period.