After surging over 12% from their mid-February lows, stocks recently entered a quiet phase of range-bound trade that has given some investors an eerie feeling.
The S&P 500
and the Dow Jones Industrial Average
ended Tuesday at their highest close of 2016, following dovish remarks by Federal Reserve Chairwoman Janet Yellen.
Read: Dow set for 100-point gain, lifted by dovish Yellen
But that doesn’t mean that the main benchmarks posted a major surge. In fact, Tuesday marked the 11th straight session in which the S&P moved less than 1% in either direction—the longest streak of market stillness since June, when that happened for 12 straight sessions, according to data from Instinet.
Meanwhile, the Chicago Board Options Exchange’s Volatility Index
—also known as Wall Street’s “fear gauge”—has recently dropped sharply, prompting worries that investors are becoming complacent and that the market could get caught off guard by another downturn.
But not all strategists think that this is the calm before a looming storm. According to Deutsche Bank’s team of market strategists, the S&P’s correction is over and the index should not fall back into correction territory unless there are clear signs of an impending U.S. recession or a new global shock causes fresh investor panic.
Yellen’s speech on Tuesday may have helped boost stocks higher but did point to concerns about global growth.
Also read: Janet Yellen is worried about global growth—and Wall Street loves it
And read: Yellen says caution on rate hikes is justified
According to Deutsche Bank’s report, released Friday, the market just came out of a so-called double-dip correction. That includes the sharp drops that took place in late summer of 2015 and in the beginning of 2016, with the S&P tumbling a total of 14.2% from May 21, 2015, to Feb. 11, 2016, its 2016 nadir.
Which means that it is unlikely that another correction can take place soon, the strategists argued.
Historically, there has been an average of 119 trading days between two drops of over 5% on the S&P since 1960.
As Feb. 11 was the lowest point of this double-dip correction, Tuesday marked 30 trading days since the market trough, while the correction itself spanned 183 trading days, according to the report.
The 30 days that had elapsed Tuesday since the low point are well below the 119-day average, as the following chart shows. Since that 2016 low, the broad-market index has gained 12.4%, according to FactSet data.
Furthermore, the average number of trading days between two corrections of over 10% is 377, which makes the possibility of another drop of 10% or higher even slimmer, according to Deutsche Bank.
But make no mistake, this doesn’t mean that the S&P is headed for new highs either, the Deutsche Bank report noted.
The potential for upside momentum is also limited, according to the strategists, as “upside is capped” given that first-quarter earnings per share are going to be down year-over-year. Potential hawkish Fed talk, the Brexit vote risk, and “the usual summer softness especially given Presidential campaign headline and geopolitical risks” will also limit the index’s capacity to surge, according to the report.
So, given that the correction is over but a significant breakout is still unlikely, the market is possibly due for the same “directionless tape” that the S&P saw over seven months in the first half of 2015, according to Frank Cappelleri, technical analyst at Instinet.
The chance for a mini-breakout for the S&P 500 is “running out of time,” Cappelleri said. “Time will tell, but we’ve still yet to see type of intense profit-taking that marked the end of the autumn advance,” he added.