Last week we highlighted the ramifications of no Fed rate hike which would be further weakness in equity markets and all week markets have been on the decline. The price action reminded me very much of what occurred back then during the European debt crisis and the S&P 500 downgrading US debt causing an aggressive correction in global markets.
I always keep all my reports and analysis on file so I looked back through these to remind myself of what was occurring and whether any form of broad “playbook” could be created for the remainder of 2015.
As it turns out there are many similarities which I highlight in point form below. Often when markets panic, we repeat prior periods of market volatility. Not in terms of day to day but broad swings and turning points do occur as humans always seem to react in the same way whenever danger appears – run!
Firstly let’s look at 2011. Below is a chart of the S&P 500 over that period and there are some key characteristics to take from the performance.
1) The S&P 500 enters 2011 following a strong rally the prior year
2) The entire 1st half of 2011 is spent trading in a 100 point sideways range with no direction
3) As the start of August emerges markets tumble in a very short and swift sell off with a move through support only taking roughly 3 days to find the low.
4) An initial bounce ensues but runs out of steam and a wild and whippy month follows with an eventual retest of the low.
5) The breach of the low is false in the first week of October and triggers an aggressive short covering rally that recovers back to the breakdown levels – a total of 200 points.
Now lets look at 2015. Again we show the S&P 500 so far this year with many similarities once again
1) The S&P 500 enters 2015 following a strong rally the prior year
2) The entire 1st half of 2015 is spent trading in a 100 point sideways range with no direction
3) As the start of August emerges markets tumble in a very short and swift sell off with a move through support only taking roughly 3 days to find the low.
4) An initial bounce ensues but runs out of steam and a wild and whippy month begins and the Fed not raising rates sees markets fall over the following week – a retest of the August lows are likely.
5) Any breach of the low is likely to be false in the first or second week of October and with the heavily shorted market could trigger an aggressive short covering rally that recovers back to the breakdown levels – around 2040. A rebound of this nature would also see a 200 point rally from the low.
As can be seen the broad market developments of 2011 and 2015 are similar. Given that much of this price action is the result of similar market fundamentals this arguably not a coincidence as people tend to react in the same way when shown a certain scenario. In late 2012 when US equities were on the brink of breaking to fresh record highs there were many similarities between global markets then and when they previously broke to new record highs in 1995 – particularly from a fundamental perspective.
In my report at the time I indicated that 2013 could be similar to 1995 in that equity markets run very strongly and exhibit similar characteristics. In the end both 1995 and 2013 were the most consistent periods of market gains with no more than 3-5 consecutive down days all year! Mentioning this is not to pat myself on the back, but rather just to highlight that markets do repeat themselves and it is important for not the price action to be the same but also the drivers to that price action. This is the key and why so many analysts and forecasters get it wrong when simply comparing one period or another. I mean how many times have we heard that the market is tracking the same way to how it did in 1929 and 1987 with a date for an impending collapse that never comes? Constantly. The reality is that the same fundamental and market underpinnings are not the same.
So what we are likely to see now is more whippy and random price action that continues to work its way lower into October. We may or may not make a new low and some indices may make new lows and others don’t. But then watch for a big reversal driven primarily by short covering. This is likely to be the best opportunity to make money for the bulls.
So don’t buy too early, we are likely to retest the recent lows or at the very best remain weak into next month. Then watch for the big reversal and ride the rally back to 5400 on the ASX 200 and 2040 on the S&P 500. Importantly – take profits! As from there we could easily re-enter another whippy and vulnerable period with little to be gained from holding stocks for the next few months. Of course we will continue to reassess our outlook and strategy news unfolds but at least we have some form of playbook from which we can look to make sense of all these wild market swings.
