History’s 4-Step Path to Market Recovery

Monday’s Shock Could Haunt Markets for Weeks, NDR Analysts Say

After the S&P 500’s sharpest drop in nearly two years on Monday, a rebound on Tuesday followed by a shaky Wednesday has left investors questioning the next steps. According to Ed Clissold, chief U.S. strategist, and Thanh Nguyen, senior quantitative analyst at Ned Davis Research, a retest of Monday’s lows is probable, but the market could regain strength in the coming weeks if a recession is avoided.

“The effects of Monday’s shock could linger for several weeks. However, current fundamentals don’t support a major bear market,” they wrote in a note on Wednesday.

The analysts pointed to a dramatic rise in the Cboe Volatility Index (VIX), often called Wall Street’s “fear gauge,” which more than doubled in just three days—a rare event that has occurred only four times before. Historically, such spikes in volatility have led to initial market drops, followed by rebounds and subsequent retests of the lows.

Monday’s 3% decline left the market oversold, setting the stage for a four-step recovery process: oversold, rally, retest, and breadth thrusts. While the market began to bounce back on Tuesday, gains were shaky by Wednesday afternoon. Clissold and Nguyen stressed that the retest phase could be critical, with the key to recovery being that fewer stocks hit new lows than during the initial selloff.

Despite the volatility, they believe that as long as underlying fundamentals remain solid, the stock market is likely to resume its uptrend after navigating this four-step recovery process.