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Why Now Is the Time to BUY Stocks

By Brett Eversole
Tuesday, September 1, 2015

Investors are scared of the next "big one."
 
U.S. stocks have fallen 50%-plus twice in the last 15 years. And after six years of stock market gains, most folks believe the next "big one" will happen soon.
 
After a volatile two weeks, the popular opinion is that it could be starting now. But history says something entirely different...
 
Based on the last 45 years of data, the recent fall in stock prices could mean double-digit gains over the next year.
 
Let me explain...
 
Between Thursday, August 20 and Monday, August 24, the S&P 500 fell 9%...
 
A crash like that is rare, to say the least. We've only seen three-day falls of that magnitude 16 other times since 1970.
 
The important question is this: What does a fall like this mean going forward?
 
Is this the start of the next "big one"? Or does this give us a contrarian opportunity?
 
History's answer is simple... Although, it might be surprising. Stocks tend to do well after crashes like the one we just witnessed...
 
Of the past 16 occurrences of a 9%, three-day fall, stocks rose over the next week 75% of the time. And they rose over the next year 81% of the time.
 
The table below shows the full details...
 
Date
1-Week Return
1-Month Return
12-Month Return
10/16/1987
-12.2%
-12.7%
-2.5%
10/19/1987
1.3%
8.1%
22.9%
10/20/1987
-1.5%
3.7%
18.0%
10/26/1987
12.3%
8.2%
24.0%
10/27/1997
7.1%
8.4%
21.5%
8/31/1998
6.9%
6.2%
37.9%
4/14/2000
5.4%
8.1%
-12.1%
7/22/2002
9.6%
14.3%
20.5%
7/23/2002
13.2%
19.0%
23.9%
10/6/2008
-5.1%
-4.8%
-0.2%
10/7/2008
0.2%
-4.4%
6.2%
10/8/2008
-7.8%
-8.1%
8.2%
10/9/2008
4.0%
2.3%
17.8%
10/10/2008
4.6%
2.2%
19.7%
11/20/2008
19.1%
15.8%
45.0%
8/8/2011
7.6%
7.1%
25.2%
Average
4.0%
4.6%
17.2%

Stocks have risen 4%, on average, one week after these occurrences. And one year later, stocks have returned 17.2%, on average.
 
You'll notice from the table that these falls often bunch together. We saw four occurrences in October 1987, for example. However, the big picture remains the same even if we look at only the first of these bunched occurrences. Take a look...
 
Date
1-Week Return
1-Month Return
12-Month Return
10/16/1987
-12.2%
-12.7%
-2.5%
10/27/1997
7.1%
8.4%
21.5%
8/31/1998
6.9%
6.2%
37.9%
4/14/2000
5.4%
8.1%
-12.1%
7/22/2002
9.6%
14.3%
20.5%
10/6/2008
-5.1%
-4.8%
-0.2%
11/20/2008
19.1%
15.8%
45.0%
8/8/2011
7.6%
7.1%
25.2%
Average
4.8%
5.3%
16.9%

Now, none of this means that stocks can't fall further from here. But history says this likely isn't the start of the next "big one." And this is already working like we'd expect...
 
The S&P 500 is already up 4% since last Monday. History says those gains could continue piling up... and double-digit gains are possible – even likely – over the next year.
 
The S&P 500 fell 9% in three days. Since 1970, that kind of decline has been a good thing going forward.
 
Don't be reckless... But this is one more reason to watch your stops closely and stay long.
 
Good investing,
 
Brett Eversole




Further Reading:

While history shows this likely isn't the start of the next "big one"... it's important to keep risk in mind in today's market. Find Steve's latest essays on the subject right here:
 
"I believe this is a major teaching moment..."
 
"Controlling my risk trumps whatever my opinion is about the markets. Plain and simple. And it always will."

Market Notes


IT'S A BULL MARKET IN GUNS

People are flocking to buy guns again... Just take a look at today's chart of gun maker Smith & Wesson (SWHC) for proof.
 
Gun demand has been strong in recent years. Following many high-profile shootings and talks of tighter gun regulations, folks stocked up on weapons. One of the biggest beneficiaries was Smith & Wesson.
 
Smith & Wesson has been around for more than 160 years. It has an excellent brand name and its products have appeared in many Hollywood classics. Plus, successful hedge-fund manager Steven Cohen is one of its largest stockholders, with more than 3 million shares.
 
Earlier this year, Smith & Wesson reported better-than-expected earnings, sending shares even higher. The stock is up 90%-plus this year alone and just struck a fresh 52-week high. It's a bull market in guns... and Smith & Wesson is leading the pack.
 

premium teaser

A contrarian bet I'm NOT making today...
 
After having a rough week, U.S. stocks have stabilized. That makes now a great time to "buy the dip" here in the U.S.
 

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