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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.
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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 a 11.6% relief rally. On Tuesday, 11 days after its first big drop, the S&P 500 rallied 9.4%.
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 . 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.
The SPDR S&P 500 ETF (NYSE: 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.
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