The 2008 Playbook Suggests We Haven't Seen The Market Bottom Yet

Before investors get too excited about the potential new support level, they need to keep this week’s trading action in perspective. DataTrek Research co-founder Nicholas Colas has been following a trading playbook based on market action in late 2008.

Colas said in a Wednesday newsletter that his 2008 playbook has been working like a charm up to this point, and it suggests the market bottom may not yet be in.

What Happened?

The S&P 500 has been following an accelerated track of exactly how it traded in late September and early October of 2008, according to Colas.

After a huge sell-off to start the month of October, the S&P 500 found brief support and traded mostly sideways for about two weeks before the sell-off resumed in late October and early November.

On Oct. 13, 2008, 10 days after the S&P 500’s first major drop, the index had an 11.6% relief rally. On Tuesday, 11 days after its first big drop, the S&P 500 rallied 9.4%.

What's Next?

In the five days following the big Oct. 13, 2008 rally, Colas said the S&P traded down just 1.8% overall. Unfortunately, the market sell-off resumed at that point.

“Remember that 2008 didn’t bottom for 38 trading sessions after the first outsized drop on September 29th [2008]. Overlay that on to the 2020 calendar and the low will come on April 30th,” Colas said.

For investors with at least a one-year investment horizon and high-risk tolerance, Colas is recommending buying at the close on each day the S&P 500 drops at least 5% in a single trading session.

Benzinga’s Take

The SPDR S&P 500 ETF SPY has rallied 10.4% overall since Monday’s close, and the U.S. is still nowhere near the end of the COVID-19 outbreak. However, a massive $2 trillion stimulus package and comments from President Donald Trump that he wants to get the U.S. economy “rarin’ to go by Easter” have some investors contemplating a light at the end of the tunnel for the first time.