Why a 2011-style crash could be coming: BNP

Why a 2011-style crash could be coming: BNP

"What's past is prologue" wrote William Shakespeare. And, according to Darren Wolfberg, Head of Cash Equity Trading at BNP Paribas, the past has a big warning for stocks.

Wolfberg says the markets have been moving in a well-defined channel since the end of the financial crisis. And, while the markets have moved up nearly 153% since its 2009 bottom, that doesn't mean it's been orderly.

(Read: Debt default damage already unfolding)

For Wolfberg, a major clue to where the markets may be headed is how it reacted two years ago when Standard & Poors downgraded the US government's debt. Since the start of this year, the S&P 500 index has behaved eerily similar to the first several months of 2011. Once the US was downgraded, though, the markets dropped 18%. At the time, the index was trading near 1,300. Today, it trades about 400 points higher.

"The parallel that I'm making today is that we're at a very similar place," says Wolfberg. "If DC is unable their ducks in a row, the risks to the market, given how over-owned it is, is that you could have a very similar revisit to the bottom of the channel."

On Monday, the S&P 500 closed at 1,710.14. An 18% drop in the S&P 500 would put the index close to 1,400, roughly near the Wolfberg's trend channel.

(Read: DC wants Dow to drop 1,000: Bove)

In a note to Talking Numbers, Wolfberg points out the differences between 2011 and today. He says that the housing market has improved, quantitative easing ("QE") is firmly in place, and the economies of China and Europe are turning for the better. But, while earnings have also brought the index to near-record levels, the outlier risk of a fiscal crisis remains.

What is the near-term trading range investors should be aware of in the markets?

Watch the video above to see the rest of Wolfberg's charts and analysis.

More from Talking Numbers:

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