Stock futures were rising sharply Tuesday morning, after a three-day decline that robbed the S&P 500 of 9 percent of its value. Traders are crediting the Chinese central bank's move to cut rates for the early and powerful bounce. But according to Tom Lee of Fundstrat Global Advisors, history indicates that a sharp move higher may be due.
Lee wrote in a Tuesday note that there have been 11 previous times when the S&P 500 fell 9 percent or more in three sessions. And in the week that followed, 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 rose the next day 73 percent of the time, albeit for a median return of 3.9 percent. And in the three months after those dramatic three-day declines, stocks only saw a median return of 7.7 percent (just mildly higher than the one-week gain).
"Usually, a waterfall decline marks the end of a correction," Lee advised.