FINANCIAL FOCUS
The Recovery
In this installation of Financial Focus, we will discuss the topic of the Stock Market Recovery after a significant decline. As always, we will provide some education and commentary for the inexperienced and/or uninformed.
In our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), in Chapter 5, we introduce the concept of Value and Contrarian investing, which are generally related to market, or stock recoveries. As we know, markets, sectors, and/or stocks experience periods of decreased, or bearish, price action. Over time, there is a history of varying forms of “reversal” after a downturn. There are essentially three main types of “recoveries” that follow a significant market decline, all of which have happened on several occasions.
The first, the “V” recovery, occurs when a sharp, quick, drop in equities is followed by an equally rapid rise to the levels which they began their fall. The time frames for the decline/incline need not be exact, but close enough to form the V-formation. The “V” formation normally follows a sudden major event (sometimes referred to as a “Black Swan”), that doesn’t live up to the initial emotional panic, or Fear, Uncertainty, and Doubt (FUD), that it caused. As the markets always tends to “over-react” to the slightest bit of news, these events can result in large pullbacks, corrections, and/or price crashes (discussed in our recent Chart Chat-Bull or Bear blog, dated 3-8-25, for more details). The “bottom,” is signified by a single pivot point, followed by sharp advances, normally accompanied by high volume. The “V-shaped” recovery typically happens very fast, and is an exceptional buying opportunity for those who can catch it in time.
The second, the “W” recovery, is usually a slower, more methodical recovery from Cycle or All-Time Highs. This type of decline typically takes place over several weeks, or months, and ultimately forms a “double-bottom” before reversing to the upside. This type of price action is normally a result of a variety of economic fears, caused by inflation, rising unemployment, consumer confidence/sentiment, slowing GDP/manufacturing, and an increasing trend of insider selling. This recovery is slower, due to uncertainty and the hesitancy of the retail investor to jump back into the market. Once a bottom pivot point is established, a small rally (also known as a “dead-cat bounce”) will occur, giving the illusion of a V-shaped recovery. This can be caused by “bargain” hunters or even short coverings, but the rally stalls, causing another short-term high pivot price. The market will then decline again, usually back to the original bottom pivot, creating the 3rd leg of the “W” formation. When the market finally settles and begins a true rally, most of the “smart” money will ease in until the price exceeds the top pivot of the preceding small rally. When that occurs, and is confirmed, the true recovery is in effect.
There is a third type of recovery that is less common, known as a “U-shaped” recovery. This occurs when a longer consolidation or flat price action follows a significant decline. The idea is that consolidation (also known as “price discovery”) indicates that the selling has been exhausted, and once the uncertainty or hesitancy has subsided, the price will slowly rise. This strategy is more of the contrarian nature, which is a value play, and tends to occur more often with sectors than individual stocks, and requires more patience. Investing legend Steven Sjuggeruud has made a living out of this type of approach, promoting quality industries that are “Hated, oversold, and in an uptrend.” Waiting for the uptrend is important, as it keeps risk lower, considering normal consolidation rules suggest a high probability that the preceding trend will continue when the sideways price action experiences a breakout.
Which type of recovery will follow the recent decline remains in question, but signs are that a “W” or “U” are likely this time around.
Together with some of the sentiment indicators we cover, one can further improve the “timing” of entries into a trade or investment, especially the Fear & Greed Index, which we review in our weekly blog. When this gauge sits in the Extreme Greed level, which it is at the time of this blog, it is often a time to consider starting small positions in appropriate equities.
For additional discussions and education, please continue to visit our BLOG section here on ASTRO-FIN, where we provide periodic updates on a variety of topics.
***As always, this information is not intended to be financial advice, or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of current economic conditions.
