A surging stock market is on the verge of signaling a ‘huge’ move — but there’s a catch

The pace of the stock market’s rise as it continues to bounce off the June lows is nearing a magnitude that preceded “huge” moves in the past. The dilemma for investors is that those moves can be in “either direction,” analysts at Jefferies observed in a weekend note.

Through Friday, the S&P 500 SPX,

has bounced more than 13% off its 2022 closing low of 3,666.77, set on June 16. While the S&P 500 remains in a bear market, having tumbled more than 20% from its Jan. 3 record close, the Dow Jones Industrial Average DJIA,
+0.23%
will exit a market correction with a close above 32,877.66 while the Nasdaq Composite COMP,
-0.50%
would exit its brutal bear market with a finish above 12,775.32.

Read: Why the US stock rally looks more like a new bull market than a bear bounce to these analysts

But it’s the large-cap benchmark S&P 500’s more-than-7% rise over the past four weeks that is “dangerously close to extremely interesting from a signal perspective,” wrote Jefferies strategists, including Andrew Greenebaum, in a Sunday note.

A rise of just more than 8% over four weeks would mark a two-standard deviation for S&P 500 rallies, they observed, based on data going back to 1990, which means the market won’t need “much more juice” to hit statistically significant territory.

And in the 17 times the S&P 500 has hit that threshold, the subsequent performance “looks massive,” they wrote, averaging 9% over the next six months. But there’s a notable caveat in that there were also several instances that saw double-digit negative returns. And when the prior six months were negative — as would be the case this time around — “the likelihood of positive returns drops precipitously,” they wrote (see chart and table below).

Jefferies

Jefferies

The takeaway, they said, is that “while the seemingly unstoppable bounce may lure folks in, there is still a strong chance it’s just a (quite tradeable) bear market rally.”

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