2008 Financial Crisis Trading Playbook Is Working Like A Charm Right Now: DataTrek

The S&P 500 and Dow Jones Industrial Average experienced their worst days since 1987 on Monday as the volatile stock market continues to whipsaw.

While the market has seemingly been extremely unpredictable for weeks now, DataTrek Research co-founder Nicholas Colas said he's been following a trading playbook based on market action in late 2008.

Colas said in a Tuesday newsletter that his 2008 playbook has been working like a charm up to this point.

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. 

Deja Vu

On Sept. 29, 2008, Colas said the financial crisis sell-off transitioned from “worried” to “frantic,” sending the S&P 500 down 8.8% on the day.

This type of frantic selling is what investors saw on Monday, March 9, 2020, when the S&P 500 dropped 7.6%.

On Sept. 30, 2008, the S&P 500 bounced back, gaining 5.4%. On March 10, 2020, the S&P 500 also bounced back, gaining 4.9%.

On Oct. 1 and Oct. 2, 2008, the S&P 500 dropped 4.5%. On March 11, 2020, the index dropped 4.9%.

The S&P 500 dropped for six consecutive trading days from Oct. 3 to Oct. 10, 2008, declining a total of 19.3% overall. In the three-plus trading days since the March 11, 2020 drop, the S&P 500 is down another 12.9%.

Colas said the 2020 sell-off seems to be more accelerated than the 2008 crash due to the large number of days in which the market has fallen at least 5%.

How To Play It

If the S&P 500 continues to follow the 2008 path, there may still be significant downside in the near-term, he said. 

“The S&P 500 bottomed in 2008 on November 20th, down 32% from the point at which it first crashed on September 29th (1106 to 752) and in today’s dollars that equates to 1,868 on the S&P 500. We’re not putting that out as a target per se, but it does line up with the 2,100 calculation we presented last night based on normalized earnings, assuming markets overshoot 10% to the downside,” 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.

For investors with lower risk tolerance, he recommends patience for now.

Benzinga’s Take

Traders shouldn't assume the SPDR S&P 500 ETF Trust SPY will continue to follow its 2008 trajectory on a nearly day-to-day basis. However, given how many similarities there are between the economic uncertainties back in 2008 and the uncertainties today, it’s not surprising that the market sell-off is playing out in a very similar manner up to this point.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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Lehman Brothers headquarters in New York City on Sept. 15, 2008. Photo by Robert Scoble via Wikimedia.