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Market Statistics

The Year of the V-Bottom

If there is a move to all-time highs in S&P 500 following the rally of the last two days, this will amount to a fifth V-bottom this year. All of these recoveries were created by dovish Fed statements near key technical support points.

SPX_20141218

Notice that previous V-bottoms took more than a month to reach new all-time highs but this last one, if it finally lives up to expectations, may achieve that in a few days.

But beware: V-bottoms and quick recoveries are not always good signs. The S&P 500 index rose 4.8% in just two days, an infrequent event that has only occurred 0.57% percent of the time since January of 1960. In addition, this move exceeded 3 sigma (3 standard deviations of 2-day returns), meaning that it is borderline normal, as shown on the chart below:

SPX_20141218_RET_ALL

The important thing to notice is that similar moves have occurred near both major tops and major bottoms. It is not entirely clear that this last sharp rally is a sign that an uptrend will last for another year or longer but given the past and the fact that the Fed seems to provide support to rising equity prices some may be compelled to reach this conclusion and go all in.

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Disclosure: no relevant positions.
Charting program: Amibroker
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