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.
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 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.
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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.
"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.
actually, this is solid analysis and a valid opinion - i only take issue with his thesis that broad market declines cannot be predicted - that assertion is flat out false.
1. in 1999 amerindo tech d fund made 254% AAAAAAAOOOOOOOOOGGAHHHHHHHHHHHH folks. the nas had gone absolutely parabolic on the charts to over 5k and warren buffett was scratching his head. any trader without the common sense to see the extremely overbought market conditions and unreal tech enthusiasm was either blind, stupid or both. markets down about 40% - tech wreck was much worse.
2. in 2006-2007 public warnings were rampant, especially by buffett (again) and nouriel roubini. and guess what, the charts were very peaked once again along with the credit/housing crash. it took 18 months for peak to trough to occur - a chart pattern even a child could follow. in the end, down around 62% overall - worse in financials and international.
3. and here we are again. compare the charts for the last two crashes. look at the current pattern of lower highs and lower lows, the greed and fear index, the chart for twitter, the china syndrome, the coming collapse of abenomics, etc. so what if it takes 18 or 24 months to unfold? the key is to recognize the patterns as early as possible and profit on the way down.
p.s. not bragging, just fact: our clients made millions both on the way down in 2008-2009 and then a lot more on the way up. we didn't have to be even close to perfect - just coming close was plenty good enough. pay attention and keep the radar up on these charts!
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.
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Even if you're a full-on bull for certain picks, it's helpful to know how negative the bets are against them.
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