S&P500: Will the V-Shape Recovery Last?

Dow Jones
Dow Jones

Since the coronavirus pandemic outbreak in late March, policymakers kept referring to the possibility of a V-shape recovery. While the economy did not recover that fast, the S&P500 did.

The first quarter of the year ended up with the quickest meltdown in the S&P500 index’s history. The velocity of the decline from a bull to bear market took everyone by surprise.

At some point, as circuit breakers were triggered, many voices called for the stock market to shut down indefinitely. Yet, it did not, and the prices recovered the lost ground almost completely.

All major sectors part of the S&P500 index rose in the second quarter – materials (61%), industrials (49%), real estate (37.4%), consumer staples (27%). These are just a few examples to illustrate the bounce.

Can it push even higher?

VIX Suggests Otherwise

The volatility index (VIX) or the fear index, just broke this week an impressive record – fifteen out of the last eighteen weeks the VIX has fallen. Typically, when VIX falls, the stock market rises, and the other way around.

The problem for the V-shape recovery to continue is that historically when the VIX reaches such levels, a stock market pullback is overdue.

S&P500 Technical Perspective

The 3k level proved to be pivotal in the recent S&P500 history. Last year the index struggled for more than six months before breaking higher.

Even on the coronavirus meltdown, the price hesitated when it met the level. Once broken to the upside again, the level acted as support on two different occasions.

Selling a rising market, as the VIX would suggest, is not wise. Any indicator may stay overbought or oversold for far longer than a trader remains solvent. Therefore, the price must show signs of reversal before going short.

As long as it remains above the blue, rising trendline, the bullish conditions continue. Being so close to the all-time high, it seems unlikely that the index would not give it a try for it.

But this being an election year in the United States, a pullback is more than possible. Hence, here is the plan. First, wait for the S&P500 to break below the rising trendline. Next, set a stop-loss at the all-time high (whichever may be). Finally, set the target at the all-important 3k level – the risk-reward ratio obtained is more than enough by all standards.

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S&P500 Price Forecast

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