#v-bottom

[livinginsealand]

Simon Rosendal throwing his V-bottom on rail.

[livinginsealand]

[jlfmi]

Santa Rally Bailed Out By Another V-Bottom

Santa Claus may not exist -- nor the Santa Rally for that matter -- but the mythical creature named the "V-Bottom" is all too real. On October 31 when we spotted the previous V-Bottom, we honestly would not have guessed that we would see yet another one before year-end. Yet, here we are with the 10th V-Bottom since March 2013, according to our criteria (see the Oct 31 post). This, after seeing just 38 in the prior 62 years combined.

The only question is: is there time to squeeze one more in before the end of the year?

[jlfmi]

Just Your Average V-Bottom

For the past year or so, we have been discussing the stock market's recent tendency to form V-bottoms after declines. By that, we mean that stocks have more or less immediately returned to the previous highs as quickly as they sold off. This is in contrast to the more traditional complex bottoming process involving a bounce and retest. As defined by the parameters we've outlined, we identified 8 V-bottoms just since the beginning of 2013. That is 1 every 2-3 months. For perspective, we identified just 38 such V-bottoms in the prior 62 years, or 1 every 1.6 years.

At the depths of the October selloff in stocks, we surmised that while perhaps the worst of the selling was over, the market may be in for a more complex bottoming process considering the extent of the damage. However, in an October 31 post, due to the S&P 500's swift recovery back to its previous high, we announced that "The V-Bottom is STILL in Fashion". 

We also included a chart in that post that tracked each of the 8 previous V-bottoms of the past 2 years as a visual guide for what to expect in the current iteration. Today we updated the chart to see how the current V-bottom has proceeded versus the template. It may "feel" as though the current version has been stronger and more persistent than previous V-bottoms. Perhaps that is due to the fact that it rallied from greater depths than any of the previous examples. However, as it turns out, the current V-bottom is just about exactly average.

Why do we say this? First of all, the current move followed the script of experiencing very little drawdown (actually, none) upon reaching its previous highs. Secondly, the average V-bottom has lasted about 35 days beyond the selloff low. Today is day 33 for the current move. Lastly, the average gain following the previous V-bottoms has been about 3.5%. This move has gained as much as 3.1%. So it has been a pretty average V-bottom across the board.

So how much longer and farther will it go? There is obviously no way to know for sure.  For all we know, it could end today. However, simply for reference, 3 V-bottom cycles traveled beyond 33 days. One lasted 41 days, which would take us to the middle of December. The other 2 lasted 57 and 58 days. That would take us roughly through the seasonally strong first week of the new year.

In terms of the magnitude of gains, the 4 V-bottom cycles that went further than this one has thus far gained between 4.1% and 7.1%. That is exactly 1-4% more than the current move. Hypothetical gains of that magnitude would put the S&P 500 at 2094-2154.

One other possible consideration is that the V-bottom cycle that lasted the longest and traveled the furthest was the one that took place at the end of last year. After carving out a low on October 8, the S&P 500 rallied 58 days and 7.1% above the prior high before topping on December 31. While it seems to be the consensus view, if traditional positive seasonality, combined with performance pressure on the part of underperforming managers exerts influence on this market, such an end of the year repeat is feasible.

We prefer to stay away from the kind of hypotheticals and what-if's contained in this post and instead focus on what "is". However, part of the conjecture is a simple recognition of the existing market environment. The more accurately you can define the type of environment you are in, the more successful you will be with your decision-making. And until further notice, we are still within the confines of a V-bottom cycle, and an average one at that.

[jlfmi]

The V-Bottom is STILL in fashion

The V is baa-aack. No, not the dreadful yet alluring mid-80's sci-fi, quasi-cult classic mini series wherein aliens arrive on Earth in a mother ship and dwell seemingly peacefully among humans while plotting to take over the planet. No, it's something more frightening, at least to perma-bears and those attempting to navigate present-day markets according to traditional methodologies. It's the V-bottom. And not only is the V-bottom still in fashion, but we are witnessing the mother ship of all recent V-bottoms.

As a refresher, when alluding to V-bottoms, we are referring to the stock market's tendency to undergo a steep sell off, only to immediately bottom and swiftly rally back to its previous highs. We distinguish these V-bottoms from more traditional bottoms in which the market retests the initial low or at least chops about temporarily before beginning its eventual ascent. Specifically, for sake of objective identification, we are using the following criteria to define V-bottoms:

a 52-week high

a subsequent greater than 3% sell off to at least a 1-month low

a subsequent rally to within 1% of the previous high with at least 7 of 10 days being up and no down days worse than -1%

We have mentioned V-bottoms several times this year...because they keep happening! As the following chart indicates, the V-bottom has been a much more frequent occurrence over the past 2 years than it has historically.

From 1950 through 2012, the S&P 500 experienced 38 such V-bottoms, or 1 every 1.6 years. Since March 2013, there have been no less than 9 V-bottoms. That is 1 every 2.2 months! In fact, the last time we mentioned V-bottoms was on September 19, which happened to be the peak of the last post-V-bottom cycle. And here we are less than a month and a half removed staring at yet another one. 

So now that we have identified yet another occurrence, what can we expect? Using the prior instances of the past 2 years as a guide, we can expect the following:

minimal drawdown (i.e., 1%) from the point the S&P 500 first recovers to within 1% of the previous high (now)

another month of gains: the average rally lasted 35.5 days after the low (today would be day 11)

the S&P 500 at 2080: the average rally has taken the index 3.5% above the previous high (2010)

Here are the paths of each of the V-bottoms since March 2013.

The current V-bottom fell further and now has recovered more ground than any of the prior occurrences. Of course, there is no guarantee that this V-bottom will follow the path set out by either the average of the previous V-bottoms or any of them individually. However, given that the V-bottom remains a common trait of the current market, fighting that path set forth over the past few years will continue to be a losing battle. Just as the skepticism toward the possibility of a V-bottom has continued to be.

________

More from Dana Lyons, JLFMI and My401kPro.

[jlfmi]

V-Bottom Update: Current Cycle Still Following The Template

On August 19, we noted that given the recent action in the stock market, "V-Bottoms" were still in fashion. By that we meant the recent propensity for the market to rebound sharply from a short-term sell off and immediately bounce to previous highs. Based on the criteria we laid out in that post, the S&P 500 had just achieved the 8th V-Bottom since the beginning of 2013 -- this, after forming just 38 such bottoms in the prior 62 years, or 1 every 1.7 years.

Our August 21 Chart Of The Day looked at the 7 V-Bottoms since 2013 to get an idea of what we might expect from the current iteration. The general tendency following the V-Bottoms was for the market to grind its way higher for another month or two, with very little in the way of drawdowns along the way. The current cycle has tracked that template over the past month since the post.

Since hitting a new high on August 21, the S&P 500 has generally moved sideways, with a slight upward bias, i.e., a grind higher. The high for the S&P 500 was set last Thursday, September 18. That marked the 29th day since the V-Bottom low. The average duration from the low to subsequent short-term high following the 7 prior V-Bottoms was 36 days, so the S&P 500 is near that benchmark. That said, the duration of the post V-Bottom rallies has varied widely. Of the 4 cycles that went further than the current one, 2 of them lasted 57 and 58 days respectively. In the present cycle, that would equate to another 5 weeks beyond today. So there is precedence for the move to persist for awhile longer.

In terms of magnitude of gain, the high on September 18 was 1.18% above the prior cycle high. That is the 2nd weakest post V-Bottom rally of the past 2 years. Interestingly, the only cycle that saw a shallower new high, at just 0.93%, occurred during the same seasonal period last year, from August to September. Perhaps that is coincidence, perhaps not.

What would be a tell that the current cycle has topped? Based on the previous 7 cycles, we see that drawdowns have been extremely limited following the move to a new high. The worst was a mere 1% below the previous cycle closing high. The high of the prior cycle was 1987.98 on July 24. Should the S&P 500 drop below about 1968, representing an approximate 1% drop below the prior high, it may be a head's up that this V-Bottom cycle has run its course.

Based on alternate analysis, we see key support on the S&P 500 at 1970-1975 so that would support the notion of the 1968 level as relevant.

Of course, the S&P 500 could break that level and proceed to form yet another V-Bottom and head back up again. We will address that possibility should it arrive. For now, the S&P 500 continues to follow the V-Bottom template laid out by the previous 7 occurrences. While we have plenty of concerns about this market (other broad indexes are not following this pattern), as long as price continues to conform to the template, we will assume the present V-Bottom cycle is still in force.

_________

More from Dana Lyons, JLFMI and My401kPro.

[jlfmi]

V-Bottoms Part 2: The Aftermath-What To Expect

On Tuesday, we discussed the stock market's new found propensity to form V-Bottoms over the past few years. Based on the criteria we laid out in the post, after averaging just 1 such bottom every 1.7 years from 1950 to 2012, the S&P 500 has registered 8 of them now in the past 18 months alone, including the move surrounding the August 7 low. So now that we've identified the pattern, what can we expect from the current iteration?

The Chart Of The Day tracks each of the V-Bottoms since 2013 from the high before the sell off to the subsequent short-term peak (which in each case preceded the next V-Bottom move). This can give us a little insight into how the current move might unfold.

One thing that is evident is that once the S&P 500 rallied all the way back to its previous high post-V-Bottom, there was very minimal giveback. The largest pullback after returning to its former high was only about 1% on a closing basis. Based on that, any sell off from here would be limited to a close around 1967 on the S&P 500. Therefore, anyone who is waiting for a pullback to buy (or cover shorts) best not wait very long before pulling the trigger. That said, a decline beyond that 1% threshold may be a head's up that there is something different about the aftermath of this V-Bottom.

In terms of potential upside, the average gain following the V-Bottoms was around 4% above the previous high. Obviously, the individual cases run the gamut with gains as low as +1% (following the August 2013 low) and as large as +7% (following the October 2013 low). For reference, a 4% gain above the S&P 500's prior high of 1987.98 would equate to 2067.50.

From a duration perspective, the average S&P 500 move lasted 36 days following the V-Bottom low until the next short-term peak was reached. That includes roughly 10 days to go from the low to the previous high. Therefore, after reaching the former high, the average rally lasted 26 days, or a little over a month. Yesterday was day 10 for the current move. Thus, another 26 days brings us to the end of September. Again, the moves varied from short (15 days following the August 2013 low) to long (58 days following the October 2013 low and 57 days following the April 2014 low).

It should go without saying that every market period is different. This event will not unfold exactly like any of the previous V-Bottoms in particular nor the average of them. It may however serve as a rough guideline of what we might expect after the most recent V-Bottom.

If the environment is indeed similar to what it has been over the past 18 months, we can likely expect moderate upside over the next few weeks to months with very little in the way of a pullback.

[jlfmi]

The V-Bottom Is Still In Fashion

Back in February, we posted a chart on a new fad that was all the rage on Wall Street: the V-Bottom. It had nothing to do with hemlines but rather the style in which the stock market had recently come to fashion its lows. Well, we're several style seasons removed from then but based on recent market action, it appears the V-Bottom is still in fashion.

What do we mean by a V-Bottom? Traditionally, market bottoms have been formed via the "retest" structure. That is, they form an initial low, bounce temporarily, then revisit -- or retest -- the initial low before rebounding on a sustainable basis. On the other hand, a V-Bottom, refers to an event in which the market sells off, then abruptly turns on a dime and rallies immediately back to its high. Whether due to increasingly eager dip-buyers or perhaps algo-driven, this phenomenon has become increasingly common over the past 18 months, at least according to our criteria.

What is that criteria? Well, in order to identify something, it must be defined. Certainly, defining V-Bottom criteria is a subjective undertaking but we attempted to do so in a manner that captured the V-Bottom phenomenon we've been observing but that wasn't so narrow it wouldn't detect historical variations of the pattern. This is what we came up with (using the S&P 500):

A 52-week high

At least a 3% decline to at least a 1-month low

A subsequent rally to within 1% of the previous high consisting of A) at least 8 up days out of 10 with B) no -1% down days

Under such criteria, the S&P 500 formed 38 V-Bottoms from 1950 through 2012. That equates to roughly 1 every 1.7 years. Yet, since just March of 2013, there have been no less than 7 V-Bottoms, and probably 8 barring a total collapse today! I'm not sure what the odds are of that occurring randomly given the previous 63 years, but they're pretty steep.

So what's the point of this observation other than mere triviality? Given the prevalence of V-Bottoms far out of line with the historical norm, there is something unmistkenly different about the current environment. Unless one is strictly a buy-and-hold investor, it pays to recognize the shifting nuances of the micro-trading environment. For example, a couple weeks ago, we presented a study based on the character of the sell off at the time. The study identified 12 similar instances in history and, without fail, each of the 12 led to further weakness. However, the last occurrence was in 2012, before the onset of the current "V-Bottom" environment. At the very least, that fact gave us pause when considering whether to become overly aggressive in expecting more selling pressure.

Indeed, the market has shot straight up since as the "V" is apparently still in.