Stock futures were rising sharply Tuesday morning, after a three-day decline that robbed the 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.
However, this one-week trick has not worked every time—and when it fails, the outcome can be wrenching.
In October 1987, the market followed its first three-day decline by falling 12.2 percent over the next week. And in October 2008, with stocks already collapsing, a three-day drop was followed by a 5.1 percent one-week fall. The three-month return that time was even worse, at negative 14.5 percent.
Yet the generally bullish Lee doubts this 9 percent drop will resemble 1987 or 2008, given the relatively robust state of the economy and arguably reasonable level of market valuations.
If one doesn't see the U.S. falling into recession, then, Tuesday could present a compelling buying opportunity for the short-term oriented.
The "speed of recovery" is "proportional to [the] decline," Lee wrote Tuesday.
Similarly, Jason Goepfert of Sentiment Trader found that the S&P tended to rise a mean of 4.3 percent the day after dropping 8 percent in three days within six months of a three-year high.