Why Today’s Markets Are Similar To The Ones Of August 2011

Why Today’s Markets Are Similar To The Ones Of August 2011
By Federalreserve (powell_jerome_060512_8x10) [Public domain], via Wikimedia Commons

Whitney Tilson’s email to investors discussing Enrique Abeyta’s latest thoughts on why the market today is like the one we saw in August 2011.

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Black DiamondCarlson Capital's Double Black Diamond Fund returned 85 basis points net in August, bringing its year-to-date net return to 4.51%. According to a copy of the fund's September update, which ValueWalk has been able to review, its equity relative value and event-driven strategies outperformed during the month, contributing 131 basis points to overall P&L. Double Read More

1) My colleague Enrique Abeyta keeps coming up with tremendous insights into what's really going on in the markets during this period of high volatility, so I'm going to keep sharing them with you. Here are extended excerpts from yesterday's issue of his weekly newsletter, Empire Elite Trader:

Let's look at what has happened over the past couple weeks...

First, this sell-off likely had little to do with the coronavirus outbreak. Instead, this market environment was primed for this kind of volatility... and the virus just gave it an excuse.

This was a situation where the S&P 500 Index hadn't seen a 2% sell-off in 124 days – the eighth-longest streak in 30 years. The index was up more than 30% in 2019 and had conditioned investors to believe that every smaller sell-off presented a tremendous buying opportunity.

The market consistently had a relative strength index ("RSI") greater than 70 and more than 10% extended from its 200-day moving average ("200-DMA"). Investors were enthusiastic, and stocks ripped higher and higher... This was a market where stocks like Tesla (TSLA) and Virgin Galactic (SPCE) were doubling – and then doubling again – in a matter of weeks...

Let's compare this situation with August 2011 and the "worst of times" for my career...

Across the board, there are plenty of similarities between August 2011 and today's situation, such as reasonably healthy economies (with some cracks), lots of monetary liquidity, long periods of low volatility, and then a historic walloping of investors!...

The overall market is far too big in many ways to be impacted in exactly the same manner, but the "damage" done by the magnitude of a big sell-off – like in August 2011 or the one we just saw – is still impactful. It takes time for the damage to subside and for things to return to normal...

This is likely to play out similarly in today's market...

  • The markets could remain volatile for the next two months (22 trading days in a typical month, so until early May)
  • Expect the S&P 500 lows from February 28 of 2,954 (close) and 2,855 (intraday) to be "tested" several times before we bottom – moves of 5% in either direction around that level. It's a big range, but markets will be volatile
  • The market will likely eventually "heal" at the end of this period, and we'll return to an environment that's more like what we saw the previous year

It's also similar to one of the first financial crises I experienced as a portfolio manager – the Long-Term Capital Management sell-off in late 1998. It was the fifth-worst five-day sell-off over the past 30 years.

It was also the first crisis where the Federal Reserve really responded with liquidity injections – cutting rates by 75 basis points in less than two months...

We've said it before here in Empire Elite Trader... in modern markets, you should either trade a lot or not trade at all.

You don't want to be caught in the middle. Those are the traders who say they don't trade very often and are long-term holders... until they lose money and then they "risk manage."

Lessons from August 2011

But if you have the right plan, this can be the "best of times" for trading strategies. Heightened volatility means big moves – in both stock prices and human psychology. Those are great conditions for disciplined traders.

Another thing to focus on is staying liquid.

In a stable or low-volatility market, it makes sense to pursue more volatile or less liquid stocks in order to achieve greater returns.

In a market where everything is volatile, why not go buy the biggest and best?

Here at Empire Elite Trader, we're always looking for oversold conditions in good companies that have solid operational and stock price momentum. Buy the best of the best – top companies with the most momentum and the most liquidity...

Last week, we added three new positions on Wednesday and another two on Friday...

And today, we're adding three new recommendations to our portfolio.

Thank you, Enrique!

If you'd like to see the entire issue of Empire Elite Trader, including the latest recommendations, click here to sign up. It's only $69 per month, and you can try it out absolutely risk-free, as you can cancel anytime within the first 30 days for a full refund – no questions asked.

Best regards,


Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)www.valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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