This 2009 Playbook Suggests Trouble Ahead For The S&P 500

The trading action in the SPDR S&P 500 ETF Trust SPY since the March lows has been surprising to many investors. But according to DataTrek Research co-founder Nicholas Colas, the stock market has nearly perfectly tracked expectations based on his 2009 playbook.

Throughout 2020, Colas tracked the 2020 S&P 500 trading action and compared it to the stages of the 2008 sell-off and the 2009 market recovery from the financial crisis.

Colas said Thursday that “it’s creepy” how much the 2020 and 2021 bounce off the March lows has been in-line with the market recovery in 2009 and 2010.

As of Wednesday’s close, the S&P 500 was up 71% from its March 2020 lows — exactly 219 days after the bottom. On Day 219 after the March 2009 lows, the S&P was up 70% from the bottom.

Related Link: S&P 500 Closely Tracking 2009 Recovery: 'It Shouldn't Look This Similar'

Back To 3,500? Unfortunately, according to the playbook, Colas said the next few weeks could be a rough patch for the S&P 500. Right around this point in 2010, Colas said the S&P 500 experienced a textbook correction that took the index down 8.2% from its highs over a period of 13 trading days.

If the S&P 500 repeats that process in 2021, it could theoretically drop from around 3,855 today to somewhere in the 3,540 range by the end of the month.

While the 2009 playbook isn’t looking particularly reassuring when it comes to the near-term market outlook, Colas said there are two things investors should keep in mind.

First, the 2009 and 2020 recoveries have deviated from each other on a couple of occasions before ultimately diverging once again. In other words, it’s difficult to predict the exact timing of the next market pullback based on 2009 trading action.

Second, Colas said long-term investors should understand that even after the S&P 500 lost 8.2% in early February of 2010, it recovered quickly and entered March 2010 back at new highs.

“This isn’t so much a trading call as an illustration of what happens as we get deeper into a cyclical recovery,” Colas said.

Benzinga’s Take: Rather than get too hung up on timing a market correction, investors should instead simply keep the 3,540 range in mind as a potential support level should the market start to sell-off at some point in the next few weeks.

If the S&P 500 continues along the 2009-2010 recovery path, the market’s 2020 gains could be small potatoes compared to the returns it generates over the next five to 10 years.