Another October Stock Market Crash?
“Take Your Money Off The Table Before The Table Takes Your Money Off of You!”
The Charts of the Major Indexes below demonstrate clearly why we have constantly warned of all these “Ascending Wedge” Patterns, “Reverse Wave” Patterns, and the much misunderstood “Hindenburg Omen”. These are the fingerprints of an UNHEALTHY stock market, poised to cascade violently lower at any time (https://markonomics101.com/2018/10/07/asset-bubbles-start-popping-as-interest-rates-surge/).
One can NOT wait until AFTER a market starts lower when either a Crash or Waterfall has begun. Trying to sell at a top usually results in selling 25% or more BELOW the top, if one sells at all. Many investors, who proudly call themselves “long term” investors, will watch months or years of gains evaporate in mere days or weeks. Desperately hoping to recoup that 25% they just gave up, they hold and hold and hold until they have no choice but to be “long term” investors or admit to being the chumps who got too greedy. Markets typically fall MUCH faster than they rise.
Some indexes are already 15% below their HIGHS in just a handful of trading days. When an “Ascending Wedge” breaks, especially after such an historic climb, Mr. Market uses investor complacency to ensure that no one acts in time to keep those gains.
October is the Month of Market Crashes – Sort Of.
October has a “reputation” for being the month during which Stock Market Crashes occur. The most famous Crashes in the United States occurred in that month in 1907, 1929, 1987, and 2008. To be clear, we at Markonomics101.com, consider a “Crash” to occur when a 10% or greater loss is suffered within a 24-hour period. Using that definition, 2008 was actually a Waterfall since no single day lost 10%.
We use the term “Waterfall” when the loss is at least 25% but spread out over a period of a few weeks or less. Waterfalls are fairly common, whereas a true “Crash” is exceedingly rare. A “Crash” usually involves a discontinuity in trading, or the complete evaporation of buyers, at prices anywhere near the last traded price. For example, if the Dow closes one day at 25,000 but opens the next morning at 23,000 with no trades in between, (also known as a “market gap”), EVERYONE LOSES.
In 1929, the NYSE lost 23% in two consecutive days, both of which were greater than 10%. In 1987, the loss was 23% in ONE day. The Panic of 1907 was 50%, but in this computerized global trading environment, Central Banks and Government interventions are so aggressive as to make a 50% daily loss unthinkable.
Roadblocks to Market Crashes.
Sometime after the 1987 Crash, a “top secret” group called the “Plunge Protection Team” was formed to prevent crashes by providing almost unlimited buying support and liquidity to sellers in order to prevent any downside acceleration.
Another measure, known as a “Circuit Breaker”, an automated halt in trading under certain conditions, was put into place (https://www.cnbc.com/2015/08/24/when-do-circuit-breakers-kick-in-cnbc-explains.html). They were first used in 1989 and have been revised to now include 3 different “Levels”: A 7% loss in the Standard & Poor’s 500 (SPX) from the prior day’s close (Level 1) halts trading for 15 minutes; Level 2 goes into effect at a 13% loss for another 15 minutes; and Level 3 at a 20% loss, also for 15 minutes. Circuit breakers cannot be used after 3:25 PM Eastern, which is 35 minutes before the 4 PM closing bell.
The aftermath of 9-11 in 2001, involved a 4 DAY trading halt. Once trading resumed, the market suffered a “Waterfall” of several consecutive large drops with none exceeding 10% in one day. It is quite possible that had trading NOT been halted on Monday morning, a full-on Crash would have taken place that day.
Is a Crash Imminent?
Following Wednesday’s bloodbath, indications in overseas and overnight trading are ominous but subject to sudden change. The Dow has reflected an additional expected loss at the opening of between 300 to 400 points in addition to the 800 it lost Wednesday. In order to trigger a Level 1 Circuit Breaker, the SPX would need to be down nearly 200 points or the equivalent of 1800 Dow points.
Market psychology is critical at these junctures (https://markonomics101.com/2018/10/08/the-psychology-of-investing/). Just days ago, we described the charts as literally screaming caution (https://markonomics101.com/2018/09/22/mr-market-and-ultra-high-risk-for-equities/). Of the 19 Wall Street Houses, 16 or 80%, projected still higher year end targets for the SPX. (SPX reached a high briefly above 2925 in September.) Some were forecasting as high as 32oo with the average roughly 3000. Wall Street analysts are not paid to be right. They are paid to provide support for the brokers to sell shares to their clients. Being BEARISH is bad for business and very bad for continued employment.
The odds of an imminent Crash are “miniscule”, but anything is possible. Historically, stock market crashes have fit a “certain pattern” which is “absent” at this time (“The Stock Market Crash Pattern”). Ironically, in early March of 2018, these circumstances were EERILY PRESENT. Those conditions were outlined in these two pieces: (https://markonomics101.com/2018/03/06/dow-jones-industrial-average-remains-in-crash-pattern/) and (https://markonomics101.com/2018/03/13/stock-markets-remain-on-crash-alert-new-highs-in-nasdaq-are-a-fake-out-not-a-break-out/).
Yet, despite these pre-conditions, no crash occurred.
What to Expect from Here.
Mr. Market never rests. He is deciding between the two most likely scenarios and will choose the one that inflicts the greatest amount of financial loss on the most people. The possibilities include, extending the Waterfall another day, or two, through Friday and turning that ill-advised complacency into outright panic to build over the weekend. All those BULLISH Wall Street Analysts, not wishing to look too inept, may suddenly hedge their BULLISH bets and even start to call for a Crash or at least more downside. You know what happens next, right? A scorching sharp rally early next week, to not only restore complacency and confidence, but inflict yet MORE losses on those who sold their positions right at the bottom of the “U” turn.
Or, the markets could stabilize today and Friday, causing absolutely NO ONE to sell. The natural assumption will be that the markets are merely going through another one of their periodic “corrections”. Mr. Market has spent the last 9 years convincing his pigeons that buying after a correction is always the right thing to do. Then he changes the rules but conveniently “forgets” to send out the memo. After a day or two of gains to calm investors, the Waterfall resumes. More losses, followed by yet again, More losses.
Mr. Market knows a thing or two about Pavlov’s dogs and LOVES to watch Lucy pull the football away, every time Charlie Brown tries to kick it. He’s the Road Runner. Everyone else is Wile E. Coyote.
Of course, other scenarios are possible too. But a true “Crash”? No evidence of that at all, yet. The more pundits that talk Crash, the less likely it becomes. They don’t call the Wall St. Crowd “Wrong Way Corrigans” for nothing (https://en.wikipedia.org/wiki/Douglas_Corrigan).
The markets remain on Ultra-High Risk Status. The most prudent strategy remains the series of steps we outlined two days ago (https://markonomics101.com/2018/10/09/how-to-survive-prosper-and-thrive-in-the-coming-bear-market-part-1/). And, something about a Table?
We hope you are enjoying the discussion, learning a little, and realizing that TRUTH and Cable TV News have nothing in common. If you would like to join our contest by submitting your own piece for Publication and win the Grand Prize of $100 plus all the fame and glory you’ve ever dreamed of, the email address to do so is Markonomics101@gmail.com. You can disagree with anything you’ve read as long as the case you make is supported, logical, and not plagiarized. You could cover any topic that fits in the Investment category. However, you must be on the mailing list to qualify. To join, simply put your email address in the box below.