The index went about 2% down on Friday and 1% up on Monday, repeating the pattern of the pre-crash market behavior of 2000 and 2007. Should we worry?
The market activity of the end of last and the beginning of this week showed alerting similarities with the market behaviour of the pre-crash periods. Ryan Detrick from LPL Financial Research says that the last times the S&P 500 (INDEX: US500) was this low on Friday and this high on the following Monday happened in August of 2007, before the 2008 crisis, and in April of 2000, right ahead of the Dot-com crash.
The analyst says that the S&P 500 was stable over the last 40 or so days, yet last Friday the index dropped 2.4%, followed by a rapid rise of over 1.5% this Monday. This is exactly the kind of "alerting" market activity the experts are talking about, referring to the similar market behavior of the S&P 500 in 2000 and 2007 when the index was down 2% on Friday and up 1% on Monday. And, as we have learnt, that did not work out that good the last times.
So the last two times the S&P 500 was this weak on a Friday and this strong on a Monday were Aug '07 and April '00 ....— Ryan Detrick, CMT (@RyanDetrick) September 12, 2016
However, after analyzing the similar market behaviour patterns between 1950 and today, Detrick concluded that this is not necessarily a sign of the new 2008. Since 1950, the market dropped on Friday and grew on Monday 9 times, all of which, with the exception of 2000 and 2007, demonstrated a future market strengthening.
According to Bespoke, over the last 66 years, the S&P has demonstrated a 2.3% increase together with positive returns, following the Friday drop and Monday spike 8 out of 9 times. And this is a rather impressive result, say the analysts. Similar to that, reports Detrick, when looking at all cases of the 2% drop and a 1% increase the following trading day, not just Friday/Monday, the market was higher almost 80% of times this happened. Since 1950, this exact market pattern has been spotted more than 90 times.
Therefore, the expert says that it's too early to panic about the market going into bearish direction, even though it did so the the last 2 times. In fact, the latest behavior of the S&P index can be attributed to the "usual" market weakness in the Autumn months and should not be taken for the indicator of an upcoming market crash. However, this is a small alert we should keep in mind.
What to expect from September?
September has been historically the "rollercoaster" month for the stock market. Last Friday was a wake-up call for the investors as the largest indexes had their worst day since the Brexit days. After a relatively stable month of August, September has started the month with a plunge. The current situation is only intensified by the investors worrying that the Fed could raise the interest rates sooner than they thought. Some analysts say, that this was the main reason for the stock market to drop on Friday.
As it was already noted, the S&P 500 finished the day on Friday at its two-month low being down 2.4% to 2,127.81, reports Fox Business. Similarly, Dow Jones (INDEX: DIJA) dropped more than 2% to 18,085.45 together with Nasdaq (NASDAQ: NDAQ) losing 2.5% closing the day with 5,125.91. This is a significant decrease considering that all 3 major indexes reached their record-high values only 2 months ago and demonstrated a quite stable performance in summer, in general.
CNN experts say that the market is likely to experience a series of volatility events this month but they will be far from being strong enough to cause the market to crash. And this September's market behavior is "not exactly 2008 all over again", they say.
Anyway, apart from guessing what the Fed will do about the interest rates and how the U.S. presidential elections will turn out, there is not much to cause the market to significantly move. At least, until the next month's earnings results.