4 Reasons the S&P 500 Could Drop 20% This Summer

NEW YORK (TheStreet) -- The S&P 500 of 2015 is looking a lot like the S&P in 2011.

In 2011, the S&P, tracked by the SPDR S&P 500 ETF (SPY), was volatile but flat going into June. The real fireworks started thereafter, when stocks dropped 20% in July and August. Could the same happen in 2015?

Here are four reasons why a 2011-like summer drop is possible:

1. 2015, like 2011 is a pre-election year. Years with the same position in the election year cycle tend to have similar features.

2. Both in 2011 and 2015, the S&P was stuck in a trading range for the first five-and-a-half months of the year. Both times the S&P was flat after 111 trading days (June 12).

3. The S&P 500 appears to be spinning wheels, or coiling. In 2015, the S&P 500 moved a total of 2,231 points (sum of swings from daily high to low) in the first 111 trading days (June 12) of the year.

What does the S&P have to show for it? A meager 1.71% gain. The last time there's been so much real volatility with little net gain was in 2009.

In essence, the S&P moved 1,305 points for one percent of gain. This ratio was only exceeded in 2011, when it took 1,309 points for one percent of gain (S&P was up 1.13% after 111 trading days).

Sometimes the market, like a snake, coils up before it strikes. Could that happen in 2015? 

4. Weakness under the hood. Price is always the final arbiter, but it's not the only thing that matters. Sometimes pure price action is deceptive, and hides an underlying trend.

Internal weakness can be one of those underlying trends, and it existed prior to the 20% 2011 meltdown.

The chart below plots the S&P 500 against the percentage of stocks above their 50-day simple moving average (SMA). Although the S&P 500 rallied to its late April high, the percentage of stocks above their 50-day SMA was unable to surpass its February high.

Fewer stocks carried the weight of new highs, and eventually collapsed. 

We see a similar, even more pronounced development today. The soldiers are abandoning the battle, leaving the fighting up to the generals.

The percentage of stocks above the 50-day SMA started to drop off significantly back in April. This is bearish.

Although summer might turn into a tough spot for stocks, the damage is likely to be limited and temporary. Why?

Because the indicator that correctly foreshadowed every major crash of the post three decades did not yet trigger a sell signal. More details here: Is this Bull Market Circling the Drain?

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

More from Opinion

Musk Goes on Unoriginal Media Tirade

Musk Goes on Unoriginal Media Tirade

What's Happening in Video Games This Week: On the Road to E3

What's Happening in Video Games This Week: On the Road to E3

Wednesday Wrap-Up: Let's Talk About General Electric

Wednesday Wrap-Up: Let's Talk About General Electric

Week of the Women From Finance to Fast Food

Week of the Women From Finance to Fast Food

Tuesday Turnaround: Micron, Autonomous Driving, and J.C. Penney

Tuesday Turnaround: Micron, Autonomous Driving, and J.C. Penney