Two-Month, 450 bps Sell-off in the SPX Apparently Now Enough to Ring the “Crash” Sirens?
We’re once again seeing notable calls or premonitions for some type of impending market crash.
Tonight, ZeroHedge trots out such a call with the use of some analogs, apparently by way of Bloomberg and Citi.
We are also on the paid subscription list of a newsletter writer who trotted out a similar call today – comparing the recent decline in the SPX to those off the highs in 1929 and 1987, once again using analogs.
This is really incredible – the SPX just hit a four-year high and has corrected ~450 bps (which has taken two months no less) and all of a sudden there’s a crash coming?
We find this ridiculous and in our view, the analogs in the ZH post and the email we received from our writer today were both constructed incorrectly and arbitrarily.
For instance, the analog in the ZH post that compares the recent SPX move off of the 1,465 high to the move off the high in August 1987 pre-October crash fails to plot these as a %, instead choosing to plot actual prices. As such, though the move off both tops appears similar, the market was already down 12% off its proximate August 1987 high when it finally crashed in October 1987. We are down 450 bps off the September high two months ago. Details, details.
Secondly, not only is the plot wrong for failing to analog in %, not price terms, it is disingenuous to create an arbitrary analog comparing one period’s price action (2012) vs. some other period (1929 or 1987) just because you want to and are trying to prove some goal-seeked point about an imminent market rally or crash. One has to consider the size of the moves into some potential top or bottom, the events, both political and economic surrounding them, etc., etc, to properly analog. In other words, context matters.
So, with all this in mind, we present our own preferred analog for thinking about the environment we have been in for the past few years. It shows the market’s run-up from summer 2010 as QE2 was introduced into the summer 2011 highs. It plots that move against the market’s run from 1986 into its August 1987 highs – in % terms, not price terms. Additionally, their respective starting points were not arbitrarily chosen – both represented the actual daily closing low of some noteworthy swing low/correction. For instance, the 2010 analog begins in early July at SPX ~1,020, or the actual post flash-crash lows that summer.
Do the run-ups look similar? Of course they do. Had you been looking at the analog in spring/summer 2011 what would you have expected? That’s right, some type of “crash-like” event – not only did the magnitude of both moves appear highly similar, they both occurred in the context of unabated euphoria.
So then the question becomes, if the run-up into both highs appeared similar and the subsequent “crash” and bottoming process all looked similar, might it be fair to assume the rally from both lows appears similar on an analog? Yup, you guessed it….though we don’t show that analog here, the rallies off both lows are highly similar indeed.
Our point? We had a crash, but it occurred last summer when nobody but the analog below was predicting it.