By Lucas Downey, Contributing Editor, TradeSmith Daily
The merciless surprise attacks on Israel over the weekend shocked the entire globe, serving as a stark reminder of how ugly this world can be sometimes…
All we can do is hope for a peaceful resolution as quickly as possible.
Of course, our expertise is in the markets, and that's where we'll focus today.
Stocks have gained quite a lot of ground since the weekend, to investors' surprise. So today we'll try to answer why stocks are seemingly shrugging off the latest war-time news.
And as usual, we'll look to history and data for clues…
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As you know, earlier this week I made a data-driven case that stocks are extremely oversold. My favorite money-flow indicator, the Big Money Index, reached a powerful buy level last seen in October 2022… near the bear market low.
It's important to understand just how oversold most stocks are right now. This chart shows it best. It details the percentage of S&P 500 stocks above their 50-day moving average.
Source: Barchart
The lower the number (right scale) the deeper the oversold levels. At the lows, less than 10% of S&P 500 stocks were above their 50-day moving average — or their average price over the last 50 days. Now, it's bounced back above 24%.
Incredibly, we'd have to go back to a year ago, October 2022, to see anything similar.
To say stocks have been on sale is an understatement. This is the first reason why stocks have held steadier than most participants imagined. They had almost nowhere to go but up.
So now we understand the overall positioning of investors coming into the weekend's horrendous attacks. Stocks were so oversold, even geopolitical conflict wasn't enough to send them lower.
Now, let's review history through a geopolitical lens to see what happens in the wake of such events.
Poring through the TradeSmith data archive, I went back and compiled some of the biggest geopolitical events since 1979 to measure how stocks tend to react afterward.
Turns out, stocks take geopolitical events better than you'd expect.
Below lists 22 major events I pulled from TradeSmith's archive since 1979, including:
1987 Stock Market Crash
Iraq's invasion of Kuwait
World Trade Center car bombing
Asian Financial Crisis
The 2008 financial crisis
And 9/11
Painful as these events are, stocks tend to handle them with solid results.
The S&P 500 gains .5% three months later. Six months later, we see a 4.4% gain. A year later, the market averages an 8.7% gain:
Historical market resilience is yet another reason why stocks have shrugged off the latest sad state of affairs.
At TradeSmith, our aim is to make you informed and ultimately a better investor. While it can seem like a good idea to go risk-off in the wake of major world events, the data says that's one of the worst things you could do.
This just proves you should keep going with your investing gameplan.
Deeply oversold conditions will likely bring a powerful lift to stocks in the coming weeks and months. And with earnings season kicking off with the big banks tomorrow, there's plenty of reason to expect greed in stock prices in Q4.
To your health and wealth,
Lucas Downey, Contributing Editor, TradeSmith Daily
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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