A ‘textbook turnaround Tuesday’ doesn’t mean meltdown is over
Turnaround Tuesday — when markets rebound from a selloff at the start of the week — is an opportunity that shows up time and again in the data. The bad news is such recoveries don’t guarantee a bottom has been reached.
Investor psychology during a rout tends to begin with jitters on Thursday, hedging on Friday and all-out selling on Monday, according to Brent Donnelly, veteran trader and president of trading analysis firm Spectra Markets. By Tuesday, the downdraft is primed for a reversal, he wrote in a note published Monday.
The numbers support the thesis. Prior to this week, the S&P 500 had fallen on a consecutive Thursday, Friday, and Monday a total of 582 times and the subsequent Tuesday delivered an average gain of 0.2% — which works out to 50% on an annualized basis, according to data going back to 1928 compiled by Bloomberg macro strategist Cameron Crise.
When losses exceeded 1% on each of the previous three sessions — as they did this past week — the Tuesday gain rises to an average 0.63%.
“We are setting up for a textbook Turnaround Tuesday,” Donnelly wrote in his note. “Things are so dramatically oversold, and Tuesday is such a bullish day of the week that I am looking for tactical fade trades,” such as a long position in the Canadian dollar against the Swiss franc, he said.
On Monday, Japan’s two key gauges had tumbled more than 12% as they sank into a bear market from their record highs hit in July. The selloff spread across global markets, with Europe’s Stoxx 600 benchmark declining 2.2%. The S&P
