S&P 500 `High/Low Predictor' Goes Against Stocks for Next Year

  • This year's index range among the narrowest since World War II
  • Stovall: Lack of movement isn't like `compressing a spring'

Anyone expecting a jump in the Standard & Poor’s 500 Index after its relatively narrow range this year may be disappointed, according to Sam Stovall, S&P Capital IQ’s chief U.S. equity strategist.

The chart below shows how Stovall drew his conclusion, presented in a report today: by tracking percentage gaps between the S&P 500’s closing highs and lows each year since 1945, as compiled by S&P Dow Jones Indices. He divided the differentials into five ranges, from smallest to largest, and calculated the index’s average percentage move in the next year for each range.

This year’s gap is 14.3 percent, which would fit in the narrowest band of Stovall’s “high/low predictor.” Years with similar stability were followed not only by the smallest average gain the next year, as the chart illustrates, but also by the smallest proportion of advances: 57 percent. Comparable figures for other ranges were as high as 79 percent.

“If you thought that a narrow annual trading range would be akin to compressing a spring that led to a jump in the following year, you can forget it,” the New York-based strategist wrote.

Stocks may go through bigger swings next year, Stovall added, based on the Federal Reserve’s decision last week to raise interest rates for the first time since 2006. For the S&P 500, the three months after rate increases got started brought an average of 16 moves of 1 percent or more since 1967. The average for the prior three months was nine.

“In other words, 2016 will likely endure increased volatility, but without much in the way of price appreciation to show for it,” he wrote.

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