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Chart of the day: A V-shaped recovery or bearish congestion?

US Stocks rallied yesterday when Joe Biden charged ahead in the Democratic nomination race, knocking democratic socialist Bernie Sanders’ odds of running against President Trump in November. We’re looking at the benchmark S&P 500 index (US500) this morning and asking: is this the bottom of a V-shaped recovery or is it all bearish congestion?

US500 chart
"US500 daily chart"

What led yesterday’s charge higher?

Investors were optimistic yesterday as they warmed to the idea of Biden’s presidential run while Congress announced an $8 billion package to combat the coronavirus outbreak.

But had markets really priced the risk of a far-left Sanders administration? Sure Sanders was ahead, but it’s unlikely the risk had been meaningfully priced in when it was way too early to call the race. Instead, it seems the boost to Biden’s campaign as moderate candidates rallied behind him - or ‘Joementum’ if you’d rather - was just an excuse for stocks to rally.

Health stocks in the benchmark index made the tidiest gains on the day, up almost 5%, as the prospect of a Sanders administration hurting the sector’s profitability felt less likely.

Bottom of the v-shaped recovery or bearish congestion?

The US500 is looking nice here: the index closed above its 200-day simple moving average (black line) and above the bullish trend line that runs from January 2018 (upper red). Add to that the earnings risk premium remains fairly cheap at this level and the bulls may have a case to take this market higher. Although a V-shaped recovery feels optimistic when daily virus cases outside of China continue to rise, this could be the formation of a slower L-shaped recovery.

On the other hand, this could all be bearish congestion. During times of crisis, the GFC included, volatility picks up and markets make considerable moves in either direction. On the left of the chart below, you’ll see considerable swings up and down as the GFC unfolded. If the virus newsflow takes a turn for the worse and price action successfully breaks below that solid support at 2855.00, we’ll be further from a recovery than it appears now.

1-day price change percentage in the S&P 500 index from January 2008 to today.
SP500 chart
"Source: Bloomberg, Pepperstone"

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