2009 Playbook Suggests Stock Market Is 'Too High'

Throughout the year, DataTrek Research co-founder Nicholas Colas has been tracking the 2020 S&P 500 trading action and comparing it to the stages of the 2008 sell-off and the 2009 market recovery from the financial crisis.

Much of the 2020 bounce off the March lows was in-line with how the market recovered in 2009, but Colas said Thursday that the S&P 500 seems to have gotten ahead of itself at this point.

As of Wednesday’s close, the S&P 500 is up 41.5% off the March lows on day 75 of the 2020 rally. At this point in 2009, the S&P 500 was up just 32.3% from its lows.

Colas said the S&P has attempted to break out ahead of its 2009 recovery pace twice already in 2020 in late March and in early June, and it quickly regressed both times.

Stages Of Recovery

Colas said the reasons why the 2009 and 2020 recoveries have been so similar is because there are philosophical underpinnings related to investor behavior following market crises. These underpinnings create two phases in the market.

The first phase lasts around 60 days and coincides with investors understanding that fiscal and monetary stimulus from the government are sufficient to stave off the crisis itself. The second phase lasts about 30 days and coincides with investors waiting for fundamental evidence and guidance corroborating that the bottom in corporate earnings is actually in.

One key difference between the 2009 recovery and the 2020 recovery is market leadership. In 2009, bank stocks led the recovery, whereas tech stocks are the market leaders in 2020. Colas said second-quarter tech stock earnings could go a long way in determining whether or not the recent rally has gone too far too fast.

“Just as no one believed the banks had bottomed in March 2009, there is now/still a very real reluctance to embrace the idea that Big Tech has not just survived the COVID Crisis but 1) actually thrived and 2) is best positioned of all sectors to grow post-COVID,” Colas wrote.

Benzinga’s Take

Given analysts are expecting mostly horrendous earnings numbers in the second quarter, the SPDR S&P 500 ETF Trust SPY seems to be pricing in some high expectations for guidance in the second half of 2020 and into 2021.

If the recent spike in COVID-19 cases in certain regions of the U.S. weighs on those expectations or delays a potential recovery, the S&P 500 could easily once again fall back in-line with the 2009 playbook.

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

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