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August 27, 2015

This Is A 2011 Redux!

They say that past is prologue. Nowhere is this more true than in financial markets, where the lessons and patterns of the past are used to make money, or avoid losing it, in the future.

I have been calling the market in 2015 a perfect candidate to match the behavior of the 19% correction in 2011. That one took two months to work through recession fears caused by political brinkmanship before a solid bottom was formed.

I think we are set up to repeat much of that behavior. Allow me to detail the ways.

The 4 Similarities to 2011

In July, all you could really talk about were two similarities…

1. Market went sideways for 7 months, with breadth breakdown threatening rollover

2. Typical “wall of worry” as China shock waves ripple over and recession chatter heats up

All we needed was a catalyst. In 2011, it was the Debt Ceiling Debacle in Washington. In August 2015, it was the Chinese devaluation of their currency, the yuan.

This catalyst gave us two more similarities…

3. Scary 1,000-point drop in Dow resembling August 4, 2011 when S&P fell 5%

4. Big violent swings occurred throughout August and September of 2011.

The last point is the most important right now because we can expect these to continue into September of 2015 as recession fears mount, China continues to meltdown, and the Fed threaten to raise interest rates.

It’s already happening. On Tuesday August 25, the S&P surged 2% on the open, then fell 3% in the last hour. On Wednesday the 26th, the index then rallied 70 points, or over 3.5%.

These violent gyrations were so common in 2011 that the VIX lived between 30 and 50 most of that two-month period. Watch the video that accompanies this article to hear me explain how the VIX has to sustain at these levels while the market is making 2-4% daily moves.

The Recession Probability Question

Also, in the video, I explain one really big difference between 2011 and 2015. Valuations were dirt cheap back then. Now they are rich.

And that’s why the S&P could go all the way back to the 2014 lows of 1750 for a “valuation re-set.” But I think anything near S&P 1800 is a great buying opportunity.

Because there is one more big difference between then and now: the recession fear is a lot lower. In 2011, recession probabilities thrown around by respected economists were as high as 50%. Right now, very few are on the fringes of a 30% chance of US recession.

Today, the S&P is finding its footing back above 1900. That could last for a few more days on a move toward 2000. But I think there will be more big sellers there who need more information from China and the US economy to update their “recession probability.”

In 2011, I called this “the recession waiting game.” This correction may or may not offer a great buying opportunity near S&P 1800 (I’m betting it does).

But one thing for sure it will offer is time to think about it as fresh information about the economy, China, and interest rates gets digested. I’m betting that period of time looks a lot like 2011 and creates a delicious bottom by mid-October.

Courtesy Kevin Cook, Senior Stock Strategist for Zacks.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle

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