One Year Forward Return on S&P 500 Stock Market Looks Historically Positive From Here

The Stock Market as represented by the S&P 500 Index had a bad day, going down 60.66 points to 996.23 for a loss of 5.74%.

Historically, today is a unique day.

Previously, this blog made a study of the S&P 500 from 1950 to March 2008 and looked at the one year forward annual return based on the S&P 500 index in relation to the 52 week high and 52 week low.

We calculated a special value called HOLU which maximizes the distance away from the 52 week high, and minimizes the distance from the 52 week low.

From 1950 to March 2008, there are only 59 trading days where the HOLU value exceeded 30%. And the average one year forward return during those 59 days was a market beating 22.13%.

Today's HOLU Value is 36.79%, with the 52 week S&P 500 low of 996.23, and the 52 week high of 1576.09.

The highest HOLU value during this period was 44.11% on October 3, 1974.

The longest time period where the HOLU value remained above 30% was from August 14, 1974 to October 9, 1974 with the exception of two days in this period where the HOLU briefly went under 30%.

Time to Accumulate?

Based on this, now might be a good time to be a contrarian and start accumulating index funds or ETFs.

However, the market could still go lower and possibly approach the record 44.11% HOLU value on October 3, 1974.

But for the true long term investor, having a cost basis around this level or lower could be a profitable move.

Today's S&P 500

Stock Market and S&P 500 Bottom Indicator Based on Extension from 52 Week Low and 52 Week High

Is there a stock market (or S&P 500) bottom indicator based on the current (S&P 500)index value in relation to the 52 week high and 52 week low?

After research, there appears to be a bottom indicator based on these values.

The Equation

The thesis we wanted to test involves this equation:

HOLU Function = (% Below 52 Week High) - (% Above 52 Week Low)

In order to find a bottom, we wish to maximize The HOLU Function (HOLU = High Overextended Low Underextended).

Theory Behind the Equation

The theory is that we want to:

1. Maximize the Percentage Below the 52 Week High:
   
   The Greater the Percentage Below the 52 week high, the more likely the market has overextended to the downside, and the bottom may be near.
   
   
2. Minimize the Percentage Above the 52 Week Low:
   
   The stock market axiom "Buy low, Sell High", appears to be true, and minimizing the percentage above the 52 Week Low is a goal.
   

So by combining both goals, we have created the HOLU Function above and we wish to maximize the value.

Method

We used data on the S&P 500 From 1950 to March 31, 2008. We looked at the HOLU Function values in relation to the forward one year return on the S&P 500. We averaged the one year forward return on the S&P 500 based on different cutoff values.

The Results



In the chart above, if we have a HOLU Value greater than 10%, the average one year forward S&P 500 return is 13.55%, many percentage points above the average one year forward S&P 500 return of 8.51% if the HOLU value is less than or equal to 10%.

When we use a larger cutoff HOLU value of 20%, we get even better results, 18.26% to 8.82%. If we have HOLU Values greater than 30%, we have the largest gain, an average one year forward S&P 500 return of 22.13% (compared to 8.97%).

So the HOLU Function/Equation above appears to generally true. With HOLU Values above 10%, 20% or 30%, we increase our chances of having a good one year forward return if we can assume that history holds. We can use a high HOLU Value above 20% or 30% as a stock market (S&P 500) bottom indicator.

Sample Bottom Days

Here is a sample of the 59 days where the HOLU Value is greater than 30%.

Date	HOLU	One Year Fwd Return	% Below 52WeekHigh	% Above 52WeekLow
10/9/2002	33.75%	33.79%	33.75%	0%
7/23/2002	34.65%	22.70%	34.65%	0%
9/21/2001	33.84%	-12.68%	33.84%	0%
12/4/1987	33.51%	22.23%	33.51%	0%
10/19/1987	33.24%	22.41%	33.24%	0%
12/6/1974	30.48%	34.75%	34.86%	4.38%
10/3/1974	44.11%	34.16%	44.11%	0%
9/13/1974	41.49%	28.51%	41.49%	0%
5/26/1970	33.03%	46.21%	33.03%	0%

Please note that October 19, 1987 is Black Monday!

Today's Value

As of March 31, 2008, the S&P 500 is 1322.70. 52 Week high is 1565.15 and 52 Week Low is 1273.37 (Closing Low).

HOLU = (% Below 52 Week High) - (% Above 52 Week Low)
= 15.49% - 3.87%
= 11.62%

While we would like HOLU values greater than 30%, 11.62% seems like a decent HOLU value if we look forward one year to the future.

Other Bottom Indicators

1. Stocks above 50 and 200 Day Moving Average
   
2. Put-Call Ratio
   
3. New High-Low Index
   
4. Ratio of Stocks Above 200 Day Moving Average to 50 Day Moving Average.
   
5. Bull Bear Ratio and Bullish Percentage
   
6. Oscillators