The Nasdaq sees much more promising results after V-bottoms, however
The S&P 500 Index (SPX) is within striking distance of new all-time highs. If the index does nab a new record soon, it will complete the V-bottom. It it is obvious where the V-bottom gets its name -- the sharp fall and quick recovery resembles a V on the charts.
This week, I will be looking at past occurrences of V-bottoms for the SPX to see how it usually performs going forward. The Nasdaq Composite (IXIC) pulled back even deeper than SPX, but it's not as close to completing the V-Bottom. Still, I’ll run those numbers as well in anticipation of it doing so.
S&P 500 V-Bottoms
Going back to 1950, I found times when SPX hit an all-time high, fell at least 9%, and then hit all-time highs. This happened 37 other times. The table below summarizes the returns after these signals.
The returns have been bearish in the short term, with the two-week and one-month returns underperforming typical returns, per the second table. The longer returns are closer to typical market returns, however.
This recent V-Bottom for the SPX was especially quick, with the recent all-time high just over a month ago. I figured a 9% pullback and new high happening in a short amount of time could be something completely different from one that happens over an extended period. Therefore, I separated the V-Bottoms in which the high, bottom, and new high happened within three months. There were 10 occurrences, with subsequent returns summarized below.
These rapid V-Bottoms have not boded well for stocks going forward. Not only have the short-term returns been bearish, but longer-term returns also underperformed. A full year after these rapid V-Bottoms, the SPX averaged a 3.1% return, with 50% of those returns positive. The index has typically averaged a 9.1% return, with 74% of returns positive for a 12-month time frame.
What About the Nasdaq?
We have IXIC data going back to 1971. The recent pullback for the index was just over 15%, but it is still about 5% from its all-time high. With that in mind, let’s look at returns after it completed a V-bottom. Specifically, I looked at 15% pullbacks and new highs occurring within a year.
There have been eight instances of this happening, and the returns are much more promising than what we saw for the SPX. These have been buying opportunities, with the IXIC averaging a 12% gain in the next six months after completing these V-bottoms, with all eight returns positive.
Since 1978 (the year of the first signal), the index averaged a 6.9% return over six-month timeframes, with 71% of the returns positive. A year after these V-bottoms, the IXIC gained 25% on average, with seven of eight returns positive. The typical 12-month return for the index has been about 14%. Hopefully, stock returns going forward will look more like these IXIC returns and less like the SPX ones mentioned above.
