Stock futures were climbing on Tuesday, after a three-day fall that led to a 9% drop in the value of the S&P 500. The gauge is currently down 1.35%. Some analysts, meanwhile, suggest that history shows a sharp move higher may come soon.
Tom Lee of Fundstrat Global Advisors wrote in his recent note that there have been 11 previous times when the S&P 500 fell 9 percent or more in three sessions. And in the following week, the market rose 9 out of 11 times, for a median return of 6.9 percent.
A one-week time period appears to be the sweet spot for a bounce. The market only jumped the next day 73 percent of the time, albeit for a median return of 3.9 percent. In the three months after those drastic three-day declines, stocks only saw a median return of 7.7 percent (only slightly higher than the one-week gain).
Lee explained that a waterfall decline usually indicates the end of a correction.
However, this observation of a one-week period has not worked every time - and when it does not, the consequences can be grinding.
In October 1987, the market followed its first
three-day decline by falling 12.2 percent over the next week.
In October 2008, with stocks already plunging, a three-day fall slid into a 5.1 percent one-week drop. The three-month return that time was even worse, at negative 14.5 percent.
At the same time, bullish Lee doubts the recent 9
percent drop in the S&P will repeat 1987 or 2008, as the current
state of the economy is relatively strong and market valuations are at arguably reasonable level.
The "speed of recovery" is "proportional to decline," Lee wrote in his note.
CNBC brought another example - of Jason Goepfert from Sentiment Trader, who found that the S&P tended to climb a mean of 4.3 percent the day after falling 8 percent in three days within six months of a three-year high.
