Be wary of claims about 'the big stock crash'

The more likely scenario is that the markets will begin to rise from here -- and that bounce is just beginning to take hold.

By MSN Money Partner Apr 16, 2014 1:11PM
Image: Crystal ball (© Brand X Pictures/JupiterimagesBy L.A. Little, MarketWatch

Market commentators love to make the big call: market crash. 

As soon as there is a sign of general market weakness, they come out of the woodwork with their crash calls. Perennial doom commentators like Marc Faber, Harry Dent and others were on the airwaves last week talking up the fear of the impending meltdown. 

If you go back through history, that's how you get famous. You repeat your bear calls each time the market wobbles, calling for a huge decline, and if it develops while your call is still fresh, then six months down the road you are a guru -- set up to live off your 15 minutes of fame for the rest of your life.

Of course, these big macro gloom-and-doom calls do nothing for the average investor/trader. In fact, one could easily make the case that they do far more harm than good, since they are wrong 99 percent of the time, and anyone who acts on the crash calls typically ends up liquidating what are likely well-positioned longs at inopportune times.

So are the crash callers right this time around? Is this that 1 percent case where you really should sell everything finally and hunker down? Is this the big meltdown that has been repeatedly called for?

In short, it is doubtful, and even if it is, it will take more time to create the structure needed for it to happen. How can one say that with confidence? What is meant by that statement? Many detractors suggest that one cannot know when a selloff is imminent and with that, I agree. Imminent implies one can call both direction and timing correctly. That is not possible with any reasonable degree of accuracy.

So, if it is impossible to predict the future with high accuracy, then what is the next best thing? How about knowing when a potential selloff is a higher-probability event in the very near future? Rather than claiming to know that an imminent selloff is about to unfold, what if one was able to forecast when the probabilities of an imminent selloff unfolding are high enough to warrant caution and to be able to do that with a reasonable degree of accuracy?

If the probabilities of a selloff occurring are reasonably infrequent, then one could limit their caution to those few periods where caution is warranted. Isn't that the sort of information that actually provides value? Isn't that they way the market usually works? Statistically, the market is in a bullish trend far more than a bearish one.

That is what neoclassical technical analysis is focused on. It focuses specifically on the market structure, trend, and supply and demand. It allows one to make these probability calls. Sure, there are many who don't believe still -- even after two years of sharing this knowledge here on MarketWatch with some very accurate calls in both direction and time.

So what does neoclassical technical analysis tells us about what is next in these markets? It suggests a likely bounce, short term. That's the actionable piece. But the structure needed for an even larger decline is now in place, as well, although unlikely to trigger immediately.

First, let's consider the breakdown case. The Nasdaq Composite Index ($COMPX) and  Nasdaq 100 (NDX)  have been the weakest indexes, and they are now nearing swing-point lows on the intermediate-term timeframe. A break of those swing points will result in breaks of multiple swing points on multiple timeframes, and that, my friends, is the structure that can lead to significantly larger declines. You can see the swing-point-low (SPL) risk here on the chart.

Note that the next SPL on this timeframe isn't that much further down either, and that the nearest SPL to current price also represents an SPL on the short-term timeframe as well. 

Recognize that since this is the intermediate-term timeframe, which is represented by weekly bars, this lurking danger isn't going away anytime soon. But there are enough extenuating circumstances to suggest that the break likely doesn't happen now, and that even if it does, it would likely be followed by a fast snapback-type rally rather than a freefall. 

Those factors include the following:

  • The decline is already extended off the highs (8.5 percent to date)
  • Bearish ABCD structures are either completing already or will be within another 1 percent decline if that occurs
  • The Standard & Poor's 500 Index ($INX) and the Dow Jones industrials ($INDU) are still showing relative strength
  • The world markets are showing relative strength
  • Monday's tests of the Friday's lows on the Russell 2000 and the Nasdaq Composite represent over/under potential reversals

Given the above, the more likely scenario is that the markets begin to rise from here and that bounce is just beginning to take hold. The short-term two- to three-bar extension on the S&P 500 appears to be done and wasn't nearly as bad as it could have been (see the Wolves are Gathering on Wall Street article last week for more details). 

A rise from here though that retests and regenerates lower per tests on the Russell 2000 and the S&P 500 would once more set up a potentially larger decline to come (as described above) once the bounces are done.

Given that the tops of the swing-point lows that were broken are about 3 percent higher or so from Monday night's closing price, this bounce is likely to have some gusto. A few days from now, once these tests have occurred, the real risk can be assessed, bounce profits garnered and risk removed if needed. Finally we actually have a traders market rather than one that moves higher day after day -- and for a trader that is quite preferable.

--L.A. Little, a professional money manager trading his own accounts while managing investment funds for qualified investors from his Colorado-based office, is the author of three books.

More from MarketWatch

Apr 16, 2014 1:55PM
This advice is worth exactly what I paid for it.
Apr 16, 2014 1:57PM
If you blindly listen to this guy, you are a fool.
Apr 16, 2014 1:57PM
Why do we own stock? If a company does not pay you part of the profits why own the stock at all? In hopes that someone will pay more for it later? Why should they? The idea that a stock is worth something because the company makes money is flawed. The only way that makes sense is if they pay you a dividend. Without a dividend the stock is worth nothing more than the paper it use to be printed on. If a company goes out of business, are you going to see any money from that investment? Are you going to see any money from the assets it sells? Stock is only worth what someone else is willing to pay for it. It's that simple.
Apr 16, 2014 5:32PM

According to the folks at Vanguard, an asset allocation like my portfolio has had 18 losing years out of the past 90. In that time, we have had 1 great depression, 12 recessions and 1 "great recession"; also, one world war. 

So, a moderately balanced allocation returned one losing year out of 5, and doubled ten times. Ten grand invested then would have grown to more than $10,000,000.

Bottom line: Don't worry about it. Pick an allocation that let's you sleep at night and go play golf. Investment services are like politics; without someone to scare into action, there's no money in it.

Apr 16, 2014 4:06PM
"Go on, Take the  money and run" Remember the song? I dont know why I read these articles. The baby boomers retirement maybe an issue but so is the lack of "Made in USA". Investing is like gambling - it is a risk that there is no return. I dont feel confident what so ever in the economy - USA or others; there is no bottom holding up the top and the top is "top heavy". I dont have a crystal ball and niether does this guy; but if you dont have a manufacturing and raw material base where you live, you are dependent upon someone that does. If that someone doesnt like you - they can just pick up their toys and go play in someone elses backyard, leaving you wondering who wants to play with you in your yard. Our country is in deep do-do with our skilled blue collar work force that is at or near retirement with no real upcomming replacement manpower. There are other examples which I dont have to expel on but yes there is a "bottom" I dont know where it is but I know it is coming.
Apr 16, 2014 3:01PM

"Market commentators love to make the big call: market crash. As soon as there is a sign of general market weakness, they come out of the woodwork with their crash calls"

Well how is that any different then those commentators who love to make the Big Call Higher. Same Difference.

Apr 16, 2014 6:51PM
With this country's massive debt, the dollar being devaluated by the Fed, and no real recovery, how can we *not* have some sort of crash in the future??
Apr 16, 2014 1:26PM
Apr 17, 2014 1:18AM
Just wait til Janet Yellen raises the interest rates.  If you look at stocks as a finite resource where business "A" only provides "X" number of shares, then the price of "X" will be based on the money supply.  Our Federal Reserve along with the government is working tirelessly to spread the effects of inflation through the petrol-dollar.  If China, Japan, Germany, and Russia decide to abandon the dollar, which they have threaten to do, then that inflation is gonna hit us like a banana republic.  Your stocks will go up, so will the cost of everything else; bread, water, energy, oil.  If Janet does the right thing and raise interest rates, in both Keynesian and Austrian schools this will cause stocks to either stall or even possibly go down.  If the flow of money printing stops and the value of stocks drop sharply, it means it's not worth much to anybody and it's value is based off it's true value and not because the tide of printed money is raising all stocks. 
Apr 17, 2014 10:13AM
"SAN FRANCISCO- Yahoo's recently fired chief operating officer, Henrique de Castro, left the Internet company with a severance package of $58 million even though he lasted just 15 months on the job. The disclosure in a regulatory filing Wednesday may lead to more second-guessing about Yahoo CEO Marissa Mayer's decision to hire de Castro as her second-in-command in October 2012. Mayer dumped de Castro in January after concluding he wasn't executing on her plan for reviving Yahoo's lackluster ad growth. De Castro had been in charge of ad sales."

One more Fry Cook who won't have to get grease on his tee shirt again. He was in charge of-- "ad sales". The war can't come soon enough.
Apr 17, 2014 5:28AM
4 major companies missing earning today: IBM, SAP, Bank of America, Google in one night. There are more companies with weak earnings. Remind me of bubble forming. Only small guys getting crush.
Apr 16, 2014 3:31PM
This guy doesn't seem to know much about Harry Dent. In 1989 Dent said the economy and stocks would boom until 2007, when the baby boomers would begin to retire. He said then the economy would struggle and stocks would sell off until 2019. Again that was all said in 1989! He nailed it 18 years in advance. And was a strong bull to begin with when few were. Stocks tanked over 50% just 7 years ago and this guy L.A. Little (I had never heard of him till now) talks like it has never happened and never will. He is entitled to his opinion but loses credibility when he starts calling others names. I would say Dent has forgot more than Little has ever known.
Apr 17, 2014 5:22AM

Upcoming correction is healthy for market to adjust to realistic value. The current market does not make much sense. Wall Street keep pushing and only interest in short term profits. There is no investment.

There are more companies missing earnings within the next 2 quarters as far as my eyes can see. The market condition does not support momentum stocks at all sizes like Netflix, Tesla, Facebook, IBM, HPQ, Google, and hundred others.

Apr 16, 2014 8:31PM
This article is a big improvement from some of the garbage MSN was posting last year.  As many of you may recall there were one or two regular authors posting doom and gloom and sell while the market went straight up.  

Over all, good article and good advice.  "" makes a good point on watching Warren Buffett, he's proven to do very well in the long run.  And before you listen to anyone do some research on their past track record.   A lot of authors who post here will give very bad advice, so beware.

As a general rule people who predict, predict anything are 95% more likely to do harm or give bad advice.
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