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“V” for Victory
Has the Stock Market Bottomed?
After a slow and steady start to 2024, the stock market has taken us on a WILD RIDE in the last few weeks!
As you know, we saw historic volatility just two weeks ago today. Since then, though, the stock market has almost fully recovered.
The S&P 500 is back to where it was at the end of July and just -2% off its high. The technology-heavy NASDAQ composite has recovered its August losses and is 5% off its highs.
Two weeks ago, the "historic" part of the volatility was the spike in the CBOE Volatility Index. This measure, created by the Chicago Board Options Exchange, shows investor expectations for volatility across the next 30 days.
Here is a chart of that measure going back twenty-five years…
From the chart, you can see that we saw a close on the VIX of over 38. This was the highest level since COVID and one of the top ten highest closes across the period.
Intraday, the VIX reached a level of over 65. THAT is the third highest level EVER after the Lehman bankruptcy and COVID.
We wrote about this last week and gave our opinion on how this compares to prior periods. You can read that report here.
Based on historical precedent (that we laid out in that note), it seemed highly likely that—while we might recover in the short term—we would retest those lows. The stock market almost never sees a "V" recovery from that level of volatility.
The key here is "almost never."
While it is the exception and not the norm, we do have precedent for the stock market recovering from these periods almost immediately.
We saw two of these recoveries just a few years ago, back in late 2018 and early 2019.
Here is a chart of the S&P 500 during that period…
Here is also the chart of the VIX across that period…
We have highlighted two periods on these charts.
The first is the year-end “freak out” that happened at the end of 2018.
We are unsure if you recall it, but after steadily grinding higher throughout 2018, the stock market began a correction in October. It worked to recover in the following couple of months, but it collapsed at the start of November.
From the start of December to the day after Christmas, it sold off 11.5%, crushing every portfolio manager's year!
You can see that the VIX spiked similarly to the 40 level during this period.
However, once the calendar year turned, the stock market recovered in a "V" and was at new highs by the start of May.
THAT is when it saw another correction and spike in volatility, and this one was much smaller. The S&P 500 sold off -6%, and the VIX reached above 20.
That correction took about a month, but it bottomed and was at all-time highs a month later.
Do we think these situations are comparable to right now?
We do. One aspect that supports this belief is that these were very recent. It's not like we are bringing up stock market action from decades ago.
Another aspect is the dramatic change we have seen in sentiment in just a few weeks.
When we called to take profits on July 15, one of our concerns was the overly enthusiastic sentiment. You can read that note here.
That has reversed in a big way and at a historic pace. Here is a post we shared on X/Twitter from the great Charlie Billelo…
Sentiment feels like it has corrected FAST! $SPY #StockMarket
— Enrique Abeyta (@enriqueabeyta)
11:14 AM • Aug 12, 2024
We also ran a poll last week to gauge people’s expectations about the potential for a retest of the lows. Here is that poll…
Do you think the LOWS in the $SPY #stockmarket are in for 2024?
— Enrique Abeyta (@enriqueabeyta)
11:07 AM • Aug 13, 2024
These results fit with other data sets that we have seen. We shared many of these on our X/Twitter feed, which you can read here.
Does this mean that we think we have now bottomed and will not retest?
No. We will still choose the historical data and the "probability" over the "possibility." That is why we have taken profits from the TRADING positions we bought in the last two weeks.
However, the idea of a "V" recovery can't be discounted, and we have seen it in the recent past.
Remember the old Wall Street saying – “The stock market will do whatever it can to F*CK the most investors possible.”
Right now, we think that is the “V”!
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