How Much Bounce Is Left In U.S. Equity ETFs?

 |  About: iShares Core S&P 500 ETF (IVV), Includes: DIA, IWV, IYY, QQQ, SPY, VOO, VTHR, VTI, WFVK
by: Tom Lydon

Stock exchange traded funds have pulled back a bit following the sharp rally from the low in early October. Investors are wondering how much bounce is left in equity ETFs for the rest of 2011.

After the late-summer sell-off, the S&P 500 bottomed out on Oct. 3 with a 19.4% decline from the top, “just missing the 20% decline threshold that traditionally signals a new bear market,” Sam Stovall, Chief Equity Strategist for S&P, wrote in a note.

According to a Standard & Poor’s report, market volatility peaked on Oct. 10 and is falling, which may signal a sustained advance in the S&P 500.

“Recent equity price performances indicate that the worst may actually be over,” Sam Stovall, Chief Equity Strategist for S&P, wrote in a note. “Should this indeed be the case, history says that a favorable period awaits for equities as three, six and 12-month price gains following baby bear markets and near-misses since 1945 averaged 13%, 23% and 32%, respectively.”

Since World War II, the S&P 500 has taken an average of four months, or a median of two, to recuperate losses after a severe corrections – price declines of 15% to 20% – in the eight previous large declines. A 24% gain from the closing low would represent a full recovery from the correction.

Furthermore, sectors with the worst performance during the large declines were most often the ones posting the largest gains in the following months. Cyclical sectors have also outperformed defensive stocks in a market recovery.

The information technology sector was the best performing sector in the past recoveries, increasing on average by 30.4% in the six months after a bottom, followed by consumer discretionary, financials and industrials. The utilities sector posted the worst performance in past recoveries, even showing negative results in one instance, according to S&P.

iShares S&P 500 (NYSEARCA:IVV)

click to enlarge

Click to enlarge

Max Chen contributed to this article.