STOCK MARKET CRASH COMPARISONS
Stock Market crashes are not easy to predict correctly. One thing we all have learned over the years is that negative sells. If you can scare someone enough you can get them to take action, presumably to buy what you are peddling. I don't know what it is about human nature that makes us more willing to accept an argument that is negative than it is to be optimistic. Perhaps it is just the natural fear of the unknown and if that unknown is a good outcome we don't need to worry. If for some reason it is a bad one we better be ready. There are certain writers that always predict declines then eventually when one happens they run to the media telling everyone how they called it.
I have been reading a few things about comparisons to prior crashes in particular 1987. Let's take a look at that now and see just how similar our current pattern is to that.
I think the problem sometimes with analysis from people who do not trade is that they are too quick to jump to conclusions. There are no dollars lost considerations to the analysis so they tend too not look deep enough. This is not to say that every trader is always right and every analyst or blogger is always wrong.
Here are where I see similarities and where I see differences. We had significant rallies in both cases. We are at a similar time of the year albeit about a month later in the current case. That is about all the similarities I see. Here are the differences.
First, the 1987 top was after a monstrous rally featuring a several standard deviation move upward. It looks like a chart of Gold from last year. During that run ADX which is about the best measure of trend strength soared. We have not had anywhere near the readings in ADX this year, and the market is essentially a double top. Typically huge moves like what took place in 1987 are reversions to the mean that really overshoot their targets. We have not had anywhere near the blow off type of action this year.
Second, the Bond market had weakened considerably in 1987 a couple of months before the top was made. That has not happened this year. Interest rates are the main drivers of stock prices. I do think the trend is in the process of shifting to down from up and that rallies should be sold, but I do not think we are going to have a market crash. The short term trend is down now so the larger moves should be in that direction, down. I am looking for some type of decent rally where we can get a good entry price on a short position. Crash articles sell magazines but for every one you get right you get 15 wrong. One of the articles I read was written by someone who is notorious for always thinking things will go down sharply. He might be right who knows, but I don't think this person actually trades. As a result I am going with my own analysis.
What we have so far is a reaction to the election so let's not panic yet. I still do not see a lot in the way of trading opportunities for tomorrow. We exited a nice long trade in our Swing Service today in the bond market at our price target, taking advantage of the big market sell off.
Everyone can chill, we have tough times ahead I am sure but I don't think a crash is going to happen just yet. Notice I said YET, it will ultimately come from what the government is doing to try and avoid it. For now the short term trend is down with the weekly on the verge of turning down, so we have to pay attention.