Another V-Shaped Rally to New Highs, What’s Next?

Screen Shot 2014-08-25 at 9.57.06 PMSince 2013 V-shaped bottom’s have been the modus operandi and this recent one has been no different, the S&P 500 rallying to new highs only 15 days after a 4.3% correction. Above is a chart that highlights all of those rallies from the bottom to the where the rally begins to stall and consolidate before then going to higher highs. Each one has a notation that highlights how many days it took to get to new highs, how long the rally lasts before the next short-term top and the percent increase from the new high to to the next short term top.

Below are some facts I put together about all V-shaped bottoms since the end of 2012:

  • There have been 10 V-shaped bottoms including this most recent one.
  • The average correction has been 5.1% and lasted 20 calendar days.
  • The average rally to new highs has been 5.9% and it took 31.5 calendar days to get there. This recent rally went to new highs (a 4.7% rally) in 15 days.
  • The average speed to new highs (taken by the percentage higher divided by the number of days it took, multiplied by 100) was 44. See asterisk below the table for a better explanation.
  • The average percent the S&P was up five trading days after making a new high was 0.54% and up 78% of the time. We are currently on trading day two. Day three starts tomorrow and so far we are up 0.28% from the higher high printed on August 21st. The largest gain was 1.8% (after making a new high from the April 2013 bottom) and the largest pull-back was -1.6% (after making a new high from the August 2013 bottom)
  • The average gain after printing new highs until the next short term top is 3.3% lasting 40 calendar days. The largest gain after making a new high was 5.6% (also after making a new high from the April 2013 bottom) and the lowest was 0.02% (also after making a new high from the April 2013 bottom).

Screen Shot 2014-08-25 at 8.13.38 PMThe take-away: Based on the history of S&P 500 V-shaped bottoms in the last two years the next three trading days doesn’t offer too much more upside; however, it also doesn’t give much credence to the bear case. Furthermore, longer term the evidence suggests we still have further upside to go before the next correction/pull-back.

Having said that I will point out that the three V-shaped bottoms that most resemble the speed of the current rally to new highs are number 4, 6 and 8. Four went on to make the largest gains in both the five days from new highs and before the next short-term top. Six and eight on the other hand were the only two to end negative five days after printing new highs and then went on to make 0.02 and 2.1 percent gains respectively before the next short-term top. Furthermore, number six was in August/September. Thursday will be five trading days from the new highs. If it’s positive then chances are likely we are setting up for much more strength. If on the other hand it is negative, then extra caution might be warranted especially since September is seasonally the weakest month of the year.

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