Stocktake: Big gains augur well for stocks

July was some month for stocks, with the S&P 500 soaring 9.2 per cent. That marked the best July since 1939. Too far, too fast? History says otherwise.

If July was euphoric, June was miserable, ending 8.4 per cent lower. There have been only five occasions where similarly huge one-month losses were followed by equivalent gains. On each occasion, notes Schaeffer’s Investment Research, stocks were higher six and 12 months later, posting average returns of 15.3 and 29.7 per cent, respectively. Of course, that’s a very small sample size. Still, big monthly gains tend to be bullish, not bearish.

Schaeffer’s found 34 instances where stocks enjoyed monthly gains of at least 7.5 per cent. Six months later, stocks registered strong median gains of 10.5 per cent. A year later, the median gain was 15.1 per cent.

Right now, the S&P 500 remains well below its all-time high. Schaeffer’s found 15 instances where the S&P 500 was over 10 per cent below all-time highs following a huge monthly gain. Again, average and median returns were much stronger than usual over the following three-, six- and 12-month periods. This time may well be different, but the point remains that there is no reason to fear big monthly gains. More often than not, strength begets strength.