Extreme weakness following negative sentiment a good sign. In Rhyming while retesting, we highlighted how negative sentiment among individual investors reached an extreme, and Monday’s 2% drop to a new 52-week low in the S&P 500 (SPX) on the back of Friday’s 1.9% drop brought about fear of an even worsening environment. Our partner Jason Goepfert at Sundial Inc. looked for prior occurrences since 1950 that saw a 1.5% drop on a Friday, followed by a 1.5% drop on Monday to a 52-week low, and found the SPX median two-month and one-year gain to be 7.9% and 25.7%, respectively (Figure 1). The SPX was never down two months out, and only saw one gain less than 20% a year later (2001, but even there is was up 6.4% two months later).
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