Rinse and Repeat: Anatomy of a Crash
“No occurance is sole and solitary, but is merely a repetition of a thing which has happened before, and perhaps often.” – Mark Twain
“If history repeats itself, and the unexpected always happens, how incapable must man be of learning from experience.” – George Bernard Shaw
Many market observers have noted the ongoing correlations between the current market environment and that of 2008. The risk of a “Lehman moment” seems to be part of almost every analysis. With so many minds focused on that possibility – none moreso that politicians and Central Bankers worldwide – it seems extremely unlikely that we’ll get what everyone is watching for. And yet, the ebbs of the flows of the 2011 market continue to play out in a manner very similar to what we saw in both 2000 and 2008 through the topping process. Notice in the chart below how the market seems to be experiencing similar cycle patterns.
In the above chart, each of the following phases repeated in 2000, 2008 and 2011:
A. Warning sell-off. Warning sell-offs in 1998 and 1999 before the 2000 top. Significant weakness in 2006 prior to the 2008 top, and in 2010 the onset of the European crisis acted as a primer for 2011’s topping action.
B. Topping. The 2000 top on the S&P wasn’t anything particularly identifiable, though NASDAQ was an old fashioned climax. Sloppy and Head-and-Shoulder patterns were formed in both 2008 and 2011.
C. Steep sell-off, and rally back to 200 day SMA. It’s worth remembering that intense volatility – even the green kind – is far more likely to be found in the midst of a Bear market.
D. Sell-off to new lows, rally back to previous low. Rinse and repeat. This “D” phase can continue at great length, as was seen in the 1930’s (see below). In the last couple of crashes, D has been at roughly the same level as A.
E. Final Capitulation. The steepest, nastiest part of the decline, when all hope has been cast aside.
I don’t believe that history actually repeats, but as Mark Twain said, “it rhymes.”