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The Most-Anticipated Stock Market Crash

US equities have been going up for so long that most investors — especially those who were only recently enticed into the casino by the apparently easy money on offer — have trouble remembering the last time it was possible to lose big in stocks.

Along the way, a whole slew of indices and indicators have drifted into their historical danger zones, prompting many in the financial media to address the subject, either by making explicit predictions (YouTube is now full of recent videos with pundits hammering the “get out while you can” theme) or considering the issue from unusual angles. Here’s a good example of the latter from MarketWatch’s L.A. Little:

How you’ll know if it’s time for a market crash

Last week, U.S. equities dropped 2% to 3%, depending on what index you monitor. That had the financial columns full of crash warnings about the coming plunge. Now to be fair, we have seen these headlines for a while now, so it’s not like they just suddenly began to appear, but the fact that there actually was some selling added a little credence to the crash worries. Sure there were a few voices of reason, but for the most part, the coming declines were all but set in stone as far as most commentators were concerned. But is that really the case? Is it finally time for a crash?

A year ago, almost to the day, I penned a piece here on MarketWatch that outlined the technical structure that precedes a crash. You can read that original column here and the follow-up column as well. Back then, the crash chorus was rising as well. The most important points of the columns were:

1. Market crashes have a technical structure that forms prior to the crash

2. Significant market declines (not crashes) also have the same exact structure

3. The technical structure is a necessary but not a sufficient condition

That last point is a salient one. What it says is that given historical data, large declines and crashes have a structure we can identify, but just because the structure is present does not necessarily mean those declines will be realized.

What is the structure? It is the break of multiple swing points on multiple timeframes across the major indexes and, in case you are wondering, we don’t have that yet . In fact, we haven’t seen that since that piece was penned a year ago. We came close a couple of times — once late last year and again earlier this year, but so far, nothing yet. Remember, even when we do get the breaks and the trend transitions that they imply, it still doesn’t follow that we will necessarily get a large decline or crash — it just raises the possibility and the resultant odds.

So what would it take to get a larger decline at this juncture? If you take the weakest index, the Russell 2000, it would need to decline another 3.7%, which is equal to another decline of equal size to last week’s push lower. That would bring it to the brink.

The same is true of the S&P 500 as a decline of another 3.5% from Monday’s closing levels would also bring it to breakdown levels

The conclusion of the MarketWatch analysis is that US equities are one really bad day (or another week like last week) from falling off of the table. Without pretending to know the future, this seems technically reasonable, since big trends tend to continue once they get going, and psychologically consistent, since so many people are waiting for such an occurrence and are presumably primed to sell and/or short this market in a big way.

In any event, a stock market correction isn’t much of a story, since there have been dozens of them in the average adult’s lifetime. Way more interesting are 1) the reasons for the long bull market and 2) the likely response of the world’s governments to a, say, 20% decline in the average stock. In a nutshell:

The S&P 500 has gone an amazing 33 months without a 10% correction because the world’s central banks have pushed interest rates down to levels that make equities the only game in town. Major corporations now find it more profitable to borrow cheap money and buy back their stock than to actually invest in their businesses. This year they’ll devote nearly a trillion dollars to this “strategy.”

Central banks, meanwhile, are beginning to invest in equities directly, something they’ve never before done on this scale. In both cases, the buyers are not bothering to analyze their purchases, they’re just steadily accumulating. This consistent inflow of funds gives the market an upward bias and stops minor corrections before they start.

As for how the world’s governments will react to a serious equities bear market, that’s easy. They’ll do what they’ve done for the past 30 years: pump more newly-created currency into the financial markets. What was once known as the “Greenspan put” is now a global guarantee of paper profits in risky assets. The European Central Bank, People’s Bank of China and Bank of Japan will all join the Fed in trying to stop a correction from turning into something worse. And in the process they’ll lead speculators to even more bizarre flights of fancy in whatever sector is hot next time around.

This will go on until the ammo stops working. That is, when fiat currencies stop functioning as money and the world’s central banks lose the ability to fool us by manipulating what used to be free markets.

15 thoughts on "The Most-Anticipated Stock Market Crash"

  1. So, go with the flow. Why fight it, bitch, cry, moan, and take losses all the time? Just take the money. I have been doing exactly that since Nov. 2012, when I finally saw the light and banished goldbuggerism from my life.

    Even if your mindset is “prepping”, the idea is to make money, not lose it.

  2. This is a very interesting situation. What seems to be going on now is what used to be considered practically (i.e., theoretically and technically) impossible because ‘markets just don’t work like this.’ Never before has there been a time in which those who are buying stocks now will supposedly “never” sell them because of the belief that the monetary authorities of the world will always provide a back stop by being “buyers of last resort.”

    But what about the other side of those trades: The sellers? If we assume those who are buying and holding equities are doing so because of the political and monetary policies in place, then what could the sellers be thinking? Why would one who owns equities in this environment be selling them (to the new buyers)? What do they think or know that leads them to diametrically opposite conclusions? Are they converting their equities to hard assets like commodities, precious metals or gems, jewelry or art, real estate or land? Or, are they “rotating” from the large cap dividend paying stocks (the ones that are selling) to other sectors?

    I suspect that most of the new buyers and inveterate holders of equities are being set up. The “smart” money is selling out and buying hard assets. It’s very hard to determine this from the available data, but it makes sense if history is any guide. All fiat currencies eventually become worthless – slowly at first and then all of a sudden – and the dollar, et al are well on their way. It’s just a question of when, not if, paper assets become worthless.

    So even though we are in unchartered territory in which the pathway is unknown, the destination is not. That means that one way or another equities are eventually going to become worthless. Maybe stock markets will never crash again in nominal terms but they will in real terms.

    1. You wrote: “That means that one way or another equities are eventually going to
      become worthless.”
      Consider Ford, GE, DuPont, utilities, Boeing, etc. How can these stocks “become worthless”? That would mean that the core of the US economy is “worthless” and Kunstler wins, we all go back to living in the late 1600’s before the industrial revolution. Yeah, they will go down a whole lot, but bear-market minimums are typically V shaped, Ford was selling for ~$1.65 March ’09, but enjoyed a nice x10 not long afterwards.

      What do you mean by “Maybe stock markets will never crash again in nominal
      terms but they will in real terms.” I have no clue, please explain, possibly with an example?

      1. Let’s say that the DOW is at 16,400, and a basket of goods and services you are tracking costs the same. A year later, the DOW is up 100%, to 32,800, but the basket of goods and services is now at 65,600. In this example, the holder of a portfolio of DOW stocks has lost half of his purchasing power.

      2. First of all, when I say “worthless” I don’t necessarily mean absolute zero, but something close to it for all practical purposes, especially as an investment.

        Now, there is a difference between objective value and monetary value. You’re right that a viable business that can produce tangible and valuable goods or services has value. However, if “your” ownership shares are denominated in dollars (or any other fiat currency for that matter) then that’s all you can exchange them for if or when you sell your shares. If the currency (dollars) don’t have much buying power at the time then you’re screwed.

        “Nominal terms” means the face value or price level. In other words, the major market indexes can be at, say, 20,000 but that doesn’t mean that when you sell your equity shares that the dollars you receive can buy much. If inflation outstrips the nominal gains in equities then the equities will lose real value (i.e., actually buying power). pipefit9 provides a good example.

        Owning (even just a part) of a business IS an asset and for that reason it should never be worthless. However, there are so many moving parts involved – including its dependence on customers and suppliers, etc. – that during economic turbulence it is possible for it to go bankrupt, among other things. The dynamics can be complex. Historically, most stock investors lose big on most stocks when the SHTF, and the collapse of major currencies would be monumental.

    1. We’ll have far more lead time than that. Santa Clause, the Easter Bunny, and Peter Pan will be throwing giant parties in everyone’s back yards long before they stop printing money, lol.

      I opened a single serving container of yogurt last night. Everyone with me was shocked by the amount of air space inside the container unfilled with product. It was literally 25% or more empty. Nothing illegal here. It said right on the side the amount of ounces of product inside, about 5 oz. I think you can guess why they put it in a 7 oz container, lol.

  3. When the crowd is screaming bear. Here comes all the scared capital flows out of bankrupt govt bonds where there is a 10-1 ratio. Regardless of all the top callers,stocks are one place where a company like Google is not bankrupt. Please explain how stocks bulled forward in the 30’s some 60% from the low in 33? Europe was being bombed. This is a war where to simply park money. Govt is fighting like mad to keep the ultimate barometer of fear Gold from rising. Dow 20000 is coming. Is your wealth safe? Or is it sitting in cash in a zombie bank or bankrupt govt bond?

  4. The correction will come, quite possibly a crash. Let’s start a pool. Who will be the first politico to say, “No one could have seen it coming!” There are oh so many candidates: any senator, congressional representative, Jack Lew, Obama, Yellen, Bernanke, Greenspan, etc. Whoever hears it first, please post details to this blog. The sad part is the vast majority of sheeple will believe them. Blame will be pointed at: Russian, China, Japan, European banks, etc. Hell will freeze over and the Vatican will announce that the Pope is pregnant before anyone in the DC administration will mention the Fed.

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