The stock market’s “V-shaped” rally has done a good job of slaughtering any short sellers who expected a January crash.
So far we have been right on our 7th February signal to go “long” stocks.
However, if history repeats, based on data going back to 1928, we think we know where stocks may be heading next…
Take a look at this data which goes back to 1928. It shows what stocks did after a “V-shaped” bottom in a bull market:
The above table was prepared by my friend Jason Geppert who does a great job of collecting and analysing historical data.
Jason says that V-shaped bottoms are historically rare and the recent one we saw in stocks this month was very extreme because it happened so quickly (see the chart below).
Based on this data, Jason says “in the very short-term, there was a strong tendency to see buyers pull back a bit, with negative returns nearly 70% of the time.”
However, any weakness did not last very long because just two weeks later stock markets were up 80% of the time.
And it gets more interesting…
The data shows that since 1928 there have only been 7 “extreme” V-shaped rallies like the one we just had (see the chart below):
Jason says that in all of those 7 “extreme” examples there was weakness in the very short-term, but two weeks later stocks showed a positive return every time but once (and that loss was -0.96%).
Based on this overwhelming historical data, and the fact that the Nasdaq remains our strongest index, we will look to buy any weakness in the Nasdaq (and the S&P 500).
As you will see from the above chart, we have support on the Nasdaq at 3600 and 3547. On the S&Ps we have support at 1807 and 1790. Look for the stock indexes to test these levels in the coming two weeks. We will establish buy positions at those levels. We shall avoid the Dow as it is the weakest index.
Alessio Rastani is a stock market trader at www.leadingtrader.com