S&P 500: Are Stocks Setting Up For A 2011-Like Waterfall Decline?

2017 Momentum Has Been Waning

The S&P 500 (INDEXSP:.INX) has been treading water for six weeks, which means bullish momentum has been getting weaker and weaker. Given what we know as of January 23, what are the odds the S&P 500 plunges this week in a manner similar to the 2011 plunge shown below?

s&p 500 waterfall decline year 2011 chart


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Yellow Flags Typically In Place

Markets can do anything at any time; an expression that applies to all markets, including the present day market. Having said that, waterfall plunges typically do not come without some type of observable deterioration already in place. The 15% plunge in 2011 occurred between the close on July 28 and the intraday low made on August 9.

How Did Stocks Look Before The 15% Plunge?

Prior to the 15% drop, the S&P 500 had been moving sideways for six months (orange line below), which speaks to indecisiveness and waning momentum. The market had also made two discernible lower highs (1 and 2 below) relative to the high made in early May 2011.

s&p 500 market consolidation before waterfall decline year 2011

Compare and contrast the 2011 chart above to the 2017 chart below. Instead of a six-month period of indecisiveness, 2017 has seen six weeks of consolidation, meaning the loss of momentum was much greater before the market plunged in 2011. Instead of making two discernible lower highs, the 2017 market made a new high 17 calendar days ago (point A below). In 2011, the last new high was made 87 days before the 15% drop.

s&p 500 market consolidation chart year 2017

How Much Damage Was In Place Before The 2011 Plunge?

In the next set of comparisons, we will remove price from the equation and focus on trends. Moving averages help us monitor the never-ending tug of war between bullish conviction and bearish conviction. Remember, the plunge in 2011 occurred between the close on July 28 and the intraday low on August 9.


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