Stats Show Case for Buying the Dip After Shock S&P 500 Slump

(Bloomberg) -- The more optimistic among the U.S. equity trading community have no doubt just one question in their minds amid the trade-war induced stock slump -- when to buy the dip. History has a few answers.

A look back at steep U.S. losses from multi-year highs does show a pattern of rapid rebounds, according to Sundial Capital Research Inc. Meanwhile, Bespoke Investment Group points to the tendency for Monday sell-offs to bounce back strongly.

“These kinds of declines tend to generate a lot of fear, because it's so out of line with what investors had recently become accustomed to,” Jason Goepfert, founder of Sundial, said in a note Monday. “But they only rarely -- never? -- morphed into a truly serious and protracted decline over the next six months.”

The S&P 500 Index fell the most this year Monday as China retaliated against U.S. tariffs by allowing the yuan to fall and announcing it would cease purchases of American farm goods. As of lunchtime trading in Asia, there was some hope the gauge's six-day and 6% slide was done -- S&P 500 futures reversed losses as China took steps to stabilize the yuan after the U.S. tagged it as a currency manipulator.

Since 1929, the U.S. benchmark has experienced such a scenario -- a slump of more than 5% within two weeks of hitting a multi-year high -- 16 times, not including its current run, said Goepfert. For 10 of those, the index jumped back to a fresh high, while it fell into a correction six times, he said. Still, the gauge never dropped into a bear market within the next six months, he added.

The fact that it was a Monday slide also offers up a glimmer of hope.

Since 1952, the S&P 500 has experienced an average next-day gain of about 1% following Monday slumps of 2.5% or more, said Bespoke's Justin Walters in a separate note. By contrast, sell-offs on Fridays average a next-day decline of 0.6%.

“Big moves lower on Mondays are more common than any other weekday, and the market typically bounces back the most on the day after big down Mondays,” Walters said. “They don't call it ‘Turnaround Tuesday' for nothing.”

To contact the reporter on this story: Eric Lam in Hong Kong at elam87@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cormac Mullen, Lianting Tu

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