Will Stocks Follow their Historical Pattern of 2011?
October 9, 2013
Chad Karnes, Chief Market Strategist
During the summer of 2011, the debt ceiling debate took the blame for sending the stock markets (NYSEARCA:IWM) down 20% from May to October of that year.
Will 2013ís debt limit drama cause the markets to behave similarly to 2011? When it comes to what really matters, 2011 and 2013 are looking eerily similar; and few people see it coming.
Is this just a mere coincidence or should we pay more attention?
Then vs. Now
There are certainly many reasons coming out of the mainstream media for 2013ís debt ceiling debacle to be different than 2011ís. Reasons such as Europe (NYSEARCA:VGK) being not as big an issue today, as well as promises from the ratings agencies that the U.S.ís credit rating (NYSEARCA:TLT) is secure are the more popular ones.
But do these reasons really have an effect on the markets?
Meanwhile, Europe still has had negative GDP growth 6 out of the last 8 quarters, its stock market (NYSEARCA:IEV) is still down from its 2011 price highs, and the ratings agencies are always late to the game in assessing risk. Their last downgrade of the U.S.ís debt occurred only after the markets had already fallen over 10% from their summer 2011 highs!
Following the news headlines coming out of Washington will get you nowhere too. We prefer a simple but comprehensive approach, which by the way, shows we should be very cautious here.
A Sober Analysis
Take a look at the chart below; it's a similar version to what was provided recently to our subscribers.
The chart displays the stock market (NYSEARCA:SPY) since 2010 overlaid with the stock market of today (SNP:^GSPC) with a goal of aligning the two time periods to see if the market today is repeating in a similar fashion to the market of 2011. Notice any similarities?
Today's market (NYSEARCA:SSO) is very much repeating similar patterns to 2011's.
In the upper left is the S&P 500 through 10/7/13 moved back in time to align to the 2011 debt ceiling timeline. The blue line on the left side is the same as that in shaded blue, since Nov 2012. Essentially I have moved the market back in time by 118 weeks, to look for price pattern similarities.
There are indeed many similarities in the marketís chart pattern between then and now with a few of them outlined below.
Just Mere Coincidences?
Shown by the chart above, the market in 2011 printed three price tops, the first in Feb 2011, the second in May 2011, and the final in July 2011. Very similarly in 2013, again the market has now made three similar price peaks shown on the left side of the chart by the dashed vertical lines.
The similarities donít end there, though, as shown in the table below. Leading up to summer 2011 price peaks, the market rose 29% from its lows in August 2010 (NYSEARCA:IVV). Since November 2012, the market gained a similar 30% to its final peak.
Finally, also shown by the analysis above, it has been 44 weeks since the marketís November 2012 price lows. Leading up to the 2011 top in early July, the market rose an eerily similar 45 weeks. Likewise the other peaks occurring in 2011 were 25 and 36 weeks long. The 2013 rally peaked in May, 27 weeks after the Nov 2012 lows, and again in August, 37 weeks later. Mayís peak occurred only 2 weeks later than the corresponding 2011 initial price peak and Augustís peak was only 1 week later. These ďcoincidencesĒ are also highlighted in the table above.
Capitalizing on Today's Similarities
History may not always repeat but it certainly can rhyme and that's why I am watching this chart closely to help us position for the stock marketís next potential moves.
We have already provided subscribers with the key levels to help us identify if the historical similarities between this market and previous ones will continue or not. And we have already capitalized on the increasing risks associated with this yearís debt deadline through our VIX (NYSEARCA:VIXY) trade,
Via our October ETF Profit Strategy Newsletter (published on 9/20) we wrote:
"The S&P 500 has been making new highs, yet the VIX (CHICAGOOPTIONS:^VIX) hasnít bottomed. This is a rather large discrepancy and the previous times stocks have made new highs without the VIX hitting new all-time lows, it warned of a short term market top. We think hedging volatility still makes sense and weíre buying the DEC 2013 call options (VIX131218C00011000) at $540."
Our VIX position is already up 50% (NYSEARCA:TVIX) over the past two weeks alone and further gains could be ahead if history repeats itself.
So far, the market is tracing out an eerily similar pattern to 2011, which makes the potential certainly there for another major market selloff, just like 2011.
If the market is to continue its 2011 ways, then the selloff is likely just beginning.
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