During the summer of 2011, the debt ceiling debate took the blame for sending the stock market down 20% from May to October of that year.
Will 2013’s 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 2013’s debt ceiling debacle to be different than 2011’s. Reasons such as Europe being not as big an issue today, as well as promises from the ratings agencies that the US’s credit rating 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 six out of the last eight quarters, its stock market 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 US’s 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. 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 displays the stock market since 2010 overlaid with the stock market of today 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 is very much repeating similar patterns to 2011's.
In the upper left is the S&P 500
(INDEXSP:.INX) 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 market’s 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 don’t 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. 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 market’s 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. May’s peak occurred only two weeks later than the corresponding 2011 initial price peak and August’s peak was only one week later. These “coincidences” are also highlighted in the table above.
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 market’s next potential moves.
If the market is to continue its 2011 ways, then the selloff is likely just beginning.
Editor's note: This story by Chad Karnes originally appeared on ETFguide.com
To read more from ETFguide, see:
One Way to Get More Income From Your Portfolio
How Do Other Assets Perform During Government Closures?
Stock Market Volatility Wakes Up, More Ahead?
No positions in stocks mentioned.