Buying the 'V-Shaped Recovery' Could Juice Your Returns By Sean Michael Cummings, analyst, True Wealth
If you bought stocks on August 12, you caught the market's best week all year... The S&P 500 Index has soared about 17% year to date. But at the start of the month, a mini panic sent the benchmark index reeling. Stocks fell 8.5% from mid-July to August 5. The market snapped back quickly, though... And the index regained most of those losses over the next two weeks. That included a record-breaking 3.9% surge the week of August 12. The low offered a great opportunity to "buy the dip." In fact, the downturn ended in the dip-buyer's Holy Grail... the "V-shaped recovery." A V-shaped recovery is exactly what it sounds like. The market takes a plunge – and bounces back just as quickly, tracing a letter "V" with its price action. Dip-buyers were rewarded with a classic V-shaped recovery this month. But history shows folks who buy after the dip will reap significant benefits, too. Let me explain... On August 5, stocks suffered their worst day since September 2022. But if you let the volatility shake you out of your long positions, you missed the best-returning week so far this year. What's more, this wasn't a fluke. The market's best-returning days often happen when volatility is at its highest. One way to see this is by tracking the 25 best and worst days for stocks going back to 1988. You'll notice that the best days (in green) and worst days (in red) tend to cluster together. Take a look... 
This chart shows the crux of the "dip-buying" strategy. When stocks fall fast, they tend to spring back just as rapidly. This month was no exception. Stocks fell 8.5% in three weeks... and surged 8% in the two weeks that followed. But here's the kicker – the recent recovery triggered another rare bullish signal for stocks. It included eight consecutive days of higher closing prices. This is a very rare signal, even in the history of V-shaped recoveries. I wanted to know what similar rallies meant for stocks going forward. So I found every instance of eight-day win streaks in the S&P 500 going back to 1928... It's rare for stocks to rise eight days in a row. We've seen this action on fewer than 1% of days in the past 96 years. But as it turned out, this signal led to outperformance in the months that followed. Take a look... 
Stocks have returned about 6% a year since 1928. But buying after an eight-day win streak was an even better strategy. Stocks returned about 11% in a typical year after these moves – significantly better than a typical buy-and-hold strategy. What's more, this win-streak signal has a strong bullish track record. Stocks were up 74% of the time in the year following the signal. And the maximum return on this signal was 51%, compared to a max drawdown of 30%. In other words, the risk-to-reward setup for these win streaks is on the buyers' side, too. So if you missed the chance to buy the dip, don't lose heart. The bull market is still intact. If you're not long stocks already, I urge you to get on board... because history shows we should expect more outperformance from here. Good investing, Sean Michael Cummings Further Reading "Markets tend to rebound quickly after bouts of volatility," Brett Eversole writes. That's why you can't afford to panic-sell. According to the data, rushing for the exits at the first sign of trouble can decimate your long-term returns... Read more here. This month, the market's "fear gauge" soared to its highest level since 2020 – and then plunged just as quickly. It's rare for this indicator to move so dramatically. But similar "crushes" have led to significant outperformance over the next year... Learn more here. |
Market Notes HIGHS AND LOWS NEW HIGHS OF NOTE LAST WEEK AstraZeneca (AZN)... pharmaceuticals
Novartis (NVS)... pharmaceuticals
Quest Diagnostics (DGX)... medical data
Koninklijke Philips (PHG)... medical technology
Aflac (AFL)... insurance
Moody's (MCO)... credit-ratings firm
TransUnion (TRU)... credit reports
Automatic Data Processing (ADP)... payroll giant
Iron Mountain (IRM)... data-storage REIT
International Paper (IP)... paper
Sherwin-Williams (SHW)... paint
Ferrari (RACE)... luxury cars
Dick's Sporting Goods (DKS)... sporting goods
Walmart (WMT)... "World Dominator" of discount retail
Simon Property Group (SPG)... shopping centers
Philip Morris International (PM)... cigarettes and alternatives
Extra Space Storage (EXR)... self-storage
Public Storage (PSA)... self-storage
Packaging Corporation of America (PKG)... packaging
Waste Connections (WCN)... trash and recycling
PPL (PPL)... natural gas NEW LOWS OF NOTE LAST WEEK Not many... It's a bull market, you know!
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