Tuesday, March 13, 2018

Possible Crash Setup for Stocks

The US stock market went parabolic late in 2017 and into the first three weeks of January 2018.  It sharply corrected. But that's not that unusual.

But several other peripheral markets also went parabolic and fully crashed just prior to the recent sharp correction: Bitcoin (and other crypto-currencies) and the inverse volatility bets. Both of these 'fringe' bubbles destroyed many $100s of Billions of highly speculative money. These fringe bubble busts occurring in recent weeks/months makes the busted parabolic rise of US stocks somewhat more perilous give the full scope of widespread speculation worldwide. We live in a time of extreme speculation in housing, stocks, bonds, art, crypto-currencies, tech stocks, etc. We indeed live in the time of the "everything bubble."

Add the fact that we have historically high market valuations --- if not THE highest. Stock price to revenue, price to GDP, Cape PE and other valuation indicators are near or at ALL TIME HIGHS. There are a many warning signs.

There are some historical precedence to these kinds of "busted parabola" market situations. See the article below. Be on the look-out for any break of the February low of S&P 2581 in the next few weeks. It could mean a sharp, historic waterfall (crash) event.

From Steven Vannelli at Knowlege Leader Capital:

Let’s look at the 1929 crash to start. The S&P 500 peaked at 31.86 on September 16, 1929. Over the next 14 days, the index experienced a 10.08% correction. Then, over the next four days, stocks bounced back by 7.54%. What followed was a seven-day period of time where stocks drifted lower, and then on October 18, 1929 the low was broken and a waterfall decline ensued. The decline from October 8, 1929 to November 13, 1929 was a 22-day waterfall decline, with stocks dropping 42.68% into November 13, 1929.


The 1987 crash was a remarkably similar experience. Stocks peaked on August 25, 1987 and then began a 7.79% decline over 18 days. Stocks then rebounded by 5.65% over the following 10 days, peaking on October 5, 1987. Over the next seven days, the low failed and a waterfall decline followed. The decline was 28.51% over four days, culminating in a low on October 19, 1987.


In the last 40 days, we’ve seen the S&P 500 peak at 2872.87 on January 26. Stocks experienced a 10.16% correction over nine days, and then they bounced back by 7.96% over the next 20 days ending last Friday, March 9. We are now in that seven-day window where stocks need to hold up.


If, over the next seven days, we drift lower and take out the 2581 low of February 8, history suggests this is a set-up for a waterfall decline. Through next Wednesday, it is time to be alert.

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