Is the S&P 500’s recent rally a sustainable V-shaped recovery?
The S&P 500’s recent bounce has investors wondering if we’re seeing a true V-shaped recovery or just a dead cat bounce.
After falling nearly 20%, the index has clawed its way back above the 200-day moving average, but the question remains: is this rally built to last?
Past performance isn’t a reliable indicator of future results
What is a V-shaped recovery?
A V-shaped recovery is characterised by a sharp decline followed by an equally rapid rebound. It’s the most common pattern seen after market shocks – think early 2020’s pandemic sell-off, where the S&P 500 bottomed in March and recovered fully by September (approximately six months) . A similar pattern unfolded in late 2018, with the index tumbling in Q4 before rebounding swiftly in early 2019.
By contrast, a dead cat bounce is a temporary, often shallow rebound before the broader downtrend resumes. Distinguishing between these two requires looking under the hood – price action alone can be misleading.
Momentum indicators to watch
Momentum indicators gauge the strength and direction of price movement, offering early clues on whether buyers or sellers are in control.
1. 200-day moving average
Past performance isn’t a reliable indicator of future results
- What it is: The average closing price over the past 200 trading days.
- Current signal: The S&P 500 has just crossed above its 200-day moving average, signalling upward momentum and favouring a V-shaped recovery.
2. Golden cross
Past performance isn’t a reliable indicator of future results
- What it is: Occurs when the 50-day moving average crosses above the 200-day moving average (the opposite is a death cross).
- Current signal: While the 50-day MA is curving up, it has yet to cross the 200-day MA. Keep an eye on this — a golden cross historically leads to positive outcomes in most cases since 1960.
Breadth indicators to watch
Breadth indicators reveal how widespread a market move is by measuring participation across individual stocks, rather than just index levels.
3. Stocks above their 50-day moving average
Past performance isn’t a reliable indicator of future results
- What it is: The percentage of S&P 500 constituents trading above their 50-day MA.
- Current signal: This metric has surged from very low levels, but a sustained rally typically requires it to exceed 80%. It’s climbing—an encouraging sign, but not yet definitive.
4. Advance–decline line
Past performance isn’t a reliable indicator of future results
- What it is: The cumulative difference between advancing and declining stocks each session.
- Current signal: Since the mid-April low, the advance–decline line has hit a fresh multi-month high, indicating broad participation and supporting the V-shaped recovery thesis.
5. Zweig indicator
Past performance isn’t a reliable indicator of future results
- What it is: A 10-day moving average of the ratio of advancing stocks to the entire market, triggering when it rises from below 40% to above 61.5%.
- Current signal: It fired at the end of April — a rare event that has consistently preceded sustained bull reversals in past decades.
What next for the S&P 500 recovery?
Three of our five key indicators (200-day MA, advance–decline line, SWAG) have already signalled bullish momentum and breadth, while the golden cross and 50-day breadth metric are moving in the right direction. If the remaining two indicators trigger, it would strengthen the case for a genuine V-shaped recovery.
Key takeaways:
- A V-shaped recovery demands both price momentum and broad participation across stocks.
- Momentum indicators (200-day MA, golden cross) favour continued upside as price action improves.
- Breadth indicators (participation above 50-day MA, advance–decline line, SWAG) confirm whether the rally is market-wide.
- Monitor the golden cross and the 80% threshold in stocks above their 50-day MA for further confirmation of a lasting rebound.
Stay tuned to Capital.com for regular analysis on this potential V-shaped recovery, market trends and trading insights.