Back on the day of the Flash Crash, I penned an article entitled “Shades of April 4, 2000“, in which I compared the May 6 stock plunge to a similar occurrence in the Nasdaq on the onset of its bubble crash:
After today’s big sell-off and subsequent reversal, I took a quick look at the Nasdaq bubble’s top in 2000 to see if I could find a similar day. Indeed, April 4 2000 showed a similarly illiquid market and trading day, as the Nazzy sold off more than 15% but reversed course and ended the day down much less.
It has been about four and a half months since the Flash Crash, and here is where the Nazzy stood four and a half months after its April 4, 2000 selloff:
Meanwhile, here is an updated look at the S&P 500, with the same timeframe as the chart above and with the analogous price events identically positioned:
And again with technicals drawn in:
In 2000, the Nasdaq Composite sold off for over three months, starting in March, and suffered a massive selloff on April 4. This plunge was triggered when January 2000 highs around 4300 were taken out. This cycle high in January is significant because it represents the market peak that was taken out to start the bubble’s final leg (the first to be unwound, the least sustainable, and perhaps the most acutely driven by malinvestment). After making a low in late May, a little under two months after the sharp move down, the Nasdaq rallied for over three months. The market peaked a little under two months after the rally began, 7 points under the 4300 level mentioned above. After a two week selloff, the market staged another month-long rally to the same 4300 level.
Looking at the S&P, the similarities are immediately apparent. The S&P sold off for a little over two months from April highs, with a massive selloff on May 6. This plunge also occurred when the preceding rally’s second to last cycle high (January highs around 1150) were taken out to the downside. Just like the Nazzy, the S&P made a low a little under two months after the Flash Crash, and also like the Nazzy, proceeded to rally for over three months from there. The market had an interim high right under the January highs level, before correcting to a higher low (just like the Nasdaq as well) and subsequently rallying back to the 1150 level, from where we now have corrected about 15 points in two days.
I’ve been mentioning that 1150 is the level to watch for to gauge where the market is headed, as a breakout suggests higher prices, but I personally see this resistance level as potentially very strong.
The connection between April 2000 & May 2010 apparently has made the rounds in financial media, and Claasen Research picked up the thesis and generated this chart, which captures the correlation very well:
So what happened after the Nasdaq rallied back to its January 2000 highs nine months after posting them? The chart below speaks for itself.
The S&P has rallied back to its January highs nine months after posting them (and remember – the fact that the highs were both in January isn’t the main point to drive home; rather, the significance is in the January highs in both situations represent the breakout levels that triggered the final leg of the rally). The January highs also represent the level where the Flash Crash started, and this is important because it represents breakeven of losses from that day.
Domestic equity mutual funds are on their 20th consecutive weekly outflow, beginning with the week of the Flash Crash. Investors are clearly running for the exits, as household deleveraging sees asset liquidations and (more importantly) equity markets exhibit money market-type returns with (junk) equity-type volatility. With the market having reversed all of its losses since the Flash Crash, and bonds, gold, and emerging equity rallying significantly in the meantime (10yr yields down over 700bps, gold up almost 10%, and emerging markets up almost 20%), investors will be more than happy to take their money and run to better risk/reward opportunities than domestic equity.
If that turns out to be the case, then price action from here should be quite bearish and the 1150 level may mark the top of the S&P for some time.
I’m short on this 1130 breakdown.
Long /ZW | 701.00 | stop 674.50 | +1.68%
Long BVN | 41.20 | stop 39.85 | +1.94%
Long USD/CAD | 1.0285 | stop 1.0200 | +50 pips
Long /ZN | 125’15 | stop 124’20 | +0’08
Short AUD/CHF | 0.9490 | stop 0.9555 | +80 pips
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Short NZD/USD | 0.7335 | stop 0.7370 | +50 pips
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Short /ES | 1130.00 | stop 1135.00
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DISCLAIMER: Nothing contained anywhere in this commentary, including analysis and trade ideas, constitutes or should be construed as investing or financial advice, suggestion, or recommendation. Please consult a financial professional and do due diligence before engaging in any purchase or sale of securities.