If you bought stocks on August 12, you caught the market’s best week all year…

The S&P 500 Index has soared about 17% year to date. But at the start of the month, a mini panic sent the benchmark index reeling. Stocks fell 8.5% from mid-July to August 5.

The market snapped back quickly, though… And the index regained most of those losses over the next two weeks. That included a record-breaking 3.9% surge the week of August 12.

The low offered a great opportunity to “buy the dip.” In fact, the downturn ended in the dip-buyer’s Holy Grail… the “V-shaped recovery.”

A V-shaped recovery is exactly what it sounds like. The market takes a plunge – and bounces back just as quickly, tracing a letter “V” with its price action.

Dip-buyers were rewarded with a classic V-shaped recovery this month. But history shows folks who buy after the dip will reap significant benefits, too.

Let me explain…

On August 5, stocks suffered their worst day since September 2022. But if you let the volatility shake you out of your long positions, you missed the best-returning week so far this year.

What’s more, this wasn’t a fluke. The market’s best-returning days often happen when volatility is at its highest.

One way to see this is by tracking the 25 best and worst days for stocks going back to 1988. You’ll notice that the best days (in green) and worst days (in red) tend to cluster together. Take a look…

This chart shows the crux of the “dip-buying” strategy. When stocks fall fast, they tend to spring back just as rapidly.

This month was no exception. Stocks fell 8.5% in three weeks… and surged 8% in the two weeks that followed.

But here’s the kicker – the recent recovery triggered another rare bullish signal for stocks. It included eight consecutive days of higher closing prices. This is a very rare signal, even in the history of V-shaped recoveries.

I wanted to know what similar rallies meant for stocks going forward. So I found every instance of eight-day win streaks in the S&P 500 going back to 1928…

It’s rare for stocks to rise eight days in a row. We’ve seen this action on fewer than 1% of days in the past 96 years.

But as it turned out, this signal led to outperformance in the months that followed. Take a look…

Stocks have returned about 6% a year since 1928. But buying after an eight-day win streak was an even better strategy. Stocks returned about 11% in a typical year after these moves – significantly better than a typical buy-and-hold strategy.

What’s more, this win-streak signal has a strong bullish track record. Stocks were up 74% of the time in the year following the signal. And the maximum return on this signal was 51%, compared to a max drawdown of 30%.

In other words, the risk-to-reward setup for these win streaks is on the buyers’ side, too.

So if you missed the chance to buy the dip, don’t lose heart. The bull market is still intact. If you’re not long stocks already, I urge you to get on board… because history shows we should expect more outperformance from here.

Good investing,

Sean Michael Cummings

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Source: Daily Wealth