Investors have gotten used to things being easy...
We've only had one sustained bear market since 2009. That was in 2022. Every other decline has been a "V" bottom, where prices recover as quickly as they fell.
The recent decline and reversal was like that too. But still, it was no ordinary "V" bottom.
Instead, this reversal was so rare that there have only been 11 similar setups over the past 76 years. And here's the positive spin on this rare setup... History shows we could see another double-digit rally over the next year.
Let me explain...
This Rebound Is Here to Stay
A "V" bottom looks great in hindsight. Everyone likes to see a quick rebound. But it can be tough to handle in real time.
Stocks never fall for no reason. So even when they recover quickly, those problems are usually still floating around. That makes folks wonder if the storm has actually passed... or if more pain is around the corner.
Folks are certainly worried about that right now. Stocks may have returned to new all-time highs... But the conflict in Iran is far from over. Energy prices remain much higher than they were before the conflict began.
Still, history says we shouldn't worry. That's because the reversal we just lived through was especially dramatic...
To see it, let's look at the relative strength index ("RSI") for the S&P 500 Index. The RSI tells us whether a recent move is too far, too fast in either direction. An RSI below 30 means stocks are oversold, while an RSI above 70 means they're overbought.
Stocks recently went from oversold to overbought within a month. Take a look...
The S&P 500's RSI fell below 30 in late March. It was back above 70 by mid-April.
That kind of lightning-fast RSI reversal is rare. We've only seen 11 other setups like this since 1950. And history is clear... These are darn good times to buy. Take a look...
If you want to build long-term wealth, the U.S. stock market has been the clear winner. It has grown by 8.2% over the past 76 years. But certain setups lead to much larger returns. A rapid RSI reversal is one of them.
Similar setups led to gains of 5.1% in three months, 8.7% in six months, and 14% over a year. That's massive outperformance. Plus, stocks were higher a year later in eight out of 11 instances... with the largest loss being just 5%.
It has also been more than 50 years since this setup led to a losing trade. And the average one-year gain over that period was an incredible 31%.
Of course, this doesn't guarantee stocks will keep marching higher from here. But history could hardly be clearer...
When stocks stage a quick RSI reversal, they don't turn around and fall again. Instead, this reversal signals a bottom... and points to much higher prices ahead.
Good investing,
Brett Eversole
Further Reading
"When stocks are rising, they tend to keep rising," Brett writes. One tech-heavy index recently rallied for one of its longest stretches ever. Despite investors' fears, this means the trend is in our favor... and we can expect big gains in the months ahead.
We can't predict exactly where the economy will go from here... But thanks to one piece of legislation, you can jump-start your kids' and grandkids' path to future success. And that's why taking this one step is the most important thing you can do for them this year.