E Is The S&P 500 Repeating Its 2011 Correction?

Our model states that the S&P 500 is not in a bear market. (We define bear markets as declines that exceed 33.33% and last more than 1 year.) The U.S. stock market is not in a bubble, so a bear market that’s caused by overvaluation is not in the cards. In addition, there is no fundamental problem with the U.S. economy like there was in 2007/2008, so an economic crisis will not cause a bear market either.

However, our model also states that the S&P is in the midst of a significant correction. We define “significant correction” as either a long correction or a big one.

The more we look at this significant correction, the more it resembles the correction of 2011. Although the fundamental reasons for these two corrections are different, the price action is practically identical. Thus, this analogue points to a potential lower low for the S&P in the upcoming months.

Different Fundamental Reasons

The 2011 correction was caused by deteriorating U.S. economic data. At the time, many investors and economists feared that the U.S. economy would enter into a recession (double dip recession). Even Warren Buffett went on record saying that the U.S. economy had suddenly deteriorated. Coming from the King of Bullishness, this was a frank and honest testament to the weak state of the U.S. economy.

The factors that are driving the current correction are a little different. No, this correction is not being caused by the Chinese stock market decline. China was in a bear market from 2010 to 2013, yet the U.S. stock market experienced a massive rally. According to our model, the current correction is caused by a medium term overvaluation problem.

After a massive rally in 2013 and 2014, a significant correction is to be expected.

Same Price Action

Despite their differences, these two corrections have eerily similar price action. Let’s look at the different stages of the 2011 correction.