The coast is not clear: signs of an imminent major stock market crash

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Despite the recent correction and regardless of the popular metric you use; PE, Shiller’s CAPE ratio or Buffett’s market comparison to GDP; This is one of the most expensive markets since 1923. The other two were the 1929 and 2000 markets and we know how they turned out. By the way, 1923 was the year the “Composite Index”, the forerunner of the S&P 500, was introduced.

The record shows that while stock prices may remain high for a long time, they eventually revert to the mean. This can happen in two ways. Either the market is sideways for a long time until earnings catch up, or there is a sharp drop for prices to be in line with historical PE indices, a reversal of the mean. History has shown that investors are not a group of patients. They will put up with a side market for a while, but eventually they will tire of the meager returns and put their money to work where they think it will give them the most profit potential. Once the ball kicks in, the market comes out in droves and a severe bear market ensues. The result: a big market crash is looming.

The question is when and was this last correction a setback or a prelude to the great fall. A study of the major bear markets indicates that the latter is more likely. In fact, a review of market declines of more than 28 percent since 1923 reveals that there is always a preamble to every major bear market. Some people are under the mistaken impression that stock market crashes occur at the top of the market. That is far from the truth.

The stock market may well be fickle, but providence is kind. It always gives us advance notice of an impending crash, grabbing our attention amid our complacency with a surprise drop and giving us a chance to get out before it seriously crashes. This is shown in the analysis below for each of the following major bear markets (28% decline or more): 2007, 2000, 1987, 1973, 1968, 1962, 1946, 1937, and 1929. Intraday prices and closings Journals are only available for the S&P 500 beginning in 1950. Therefore, the Dow Jones Industrial Average closes were used for markets prior to that.

2007

The initial ceiling for the 2007 market came on July 17 when the S&P 500 hit an intraday high of 1,555.90. The index would drop next week and finally settle at an intraday low of 1,370.60 a month later, on August 16, a drop of 11.9%. From now on, all highs and lows are intraday, unless otherwise stated. The market would rise for seven weeks to reach a market cap for the index of 1576.09 on October 11, 2007, 1.3% higher than its previous high. An initial 5.5% decline was followed by a rapid recovery to 1,552.76 on October 31, before succumbing and falling 10.8% to a low of 1406.10 on November 26, 2007. The index fell. it would recover to a maximum of 1523.57 and would continue in a series of lower lows and highs until its nadir of 666.79 on March 9, 2009 for a decrease of 57.7%.

2000

The 2000 market gave a lot of warnings before the Dot.com crash. The market faltered just after opening the new year on January 3. After peaking at 1478, the S&P 500 fell to 1455.22 at the close. It fell below 1,400 for the next three days and recovered to 1,465.71, the high of January 20, 2000. From there, it rolled down to the low of 1,329.15 on February 25, a drop of 10 , 1% from its maximum so far. The market finally reached its climax at 1552.87 on March 24, 2000. It would drop precipitously on April 14 to a low of 1339.40 – a drop of 13.7% – but then slowly recovered to 1530.09 on September 1, 2000, just 1.5%. below its all-time high. Thereafter, it was down steadily with some sharp declines followed by rallies, but only as far as the downtrend line. The market bottomed at 775.80 on October 9, 2002 for a 50.1% drop.

1987

The bear market of 1987 was fast. After swinging to a high of 337.89 on August 25, 1987, the S&P 500 fell to 308.58 on September 8, a hit of 8.7%. It quickly recovered to 328.94 on October 2, just 2.6% below its high. It staggered to a close below 300 on Oct. 15 before crashing next Monday to close at 224.84, a 20.5% loss for that day. It would close lower on December 4, 1987 at 223.92, but the lowest point of the movement occurred the day after the fall, on October 20, when it fell to 216.46 for a loss of 36.0%. from the peak of August.

1973

This, along with the 1968 bear market, was part of the mega bear market that spanned from 1967 to 1982. The S&P hovered within the 100 and 110 range for most of the year. It passed the 110 barrier in late summer only to dip below it again before making its final surge when the year closed. It peaked at 119.79 on December 12, 1972 and then fell 4.3% to 114.63 on December 21, 1972. The New Year propelled the index higher, reaching a peak of 121.74 on December 11. January 1973, an increase of 1.6% from the previous high. It quickly fell to 111.85 on February 8 and then proceeded to slide down over a series of potholes to bottom out at 60.96 on October 4, 1974, a loss of 49.9%.

1968

After an initial dip to start the year, the market rose steadily from March to November and finally topped on December 2, 1968 when the S&P 500 peaked at 109.37. The index fell to 96.63 on January 13, 1969 (a drop of 11.6%), failed to rebound reaching 0.43 points from the March 17 low, and then rebounded to 106.74 on May 14. 1969. After approaching 2.4% of the top it finally succumbed to bottom on May 26, 1970 at 68.61. That was a 37.3% haircut.

1962

The stock market rose steadily from October 1960 to December 1962 when the S&P 500 peaked at 72.64 on December 12, 1962. It then fell to 67.55 on January 24, 1963 for a loss of 7, 0%. The index quickly returned to 70 the following week and made a small gain the following month and finally peaked at 71.44 on March 15, 1.7% below the high. Thereafter, the index fell to 51.35 on June 25, 1962 for a decrease of 29.3%.

1946

The market had been on a roll since the latter part of WWII and started 1946 in the same way gaining 8% in February. S&P 500 intraday highs and lows were not available for analysis, so Dow Jones Industrial Average closes will be used hereinafter. The Dow Jones closed at 206.61 on February 5, 1946. The index then plunged 10% to close at 186.02 on February 26. It quickly recovered its previous high and topped it on a horseback ride to 212.5 on May 29, 1946, a gain of 2.9%. from its previous peak. The bumpy ride continued until August, when the index hit 204.52 on August 13 and then fell from exhaustion and finally closed at 163.13 on October 9, 1946 for a decrease of 23.2%. Despite a series of recovery attempts, the market would continue to struggle until February 1948 with a maximum loss of 28%.

1937

After a steep decline from 1929 to 1932, the market appeared to be in recovery mode until it stabilized in early 1937. The Dow Jones closed at 194.4 on March 10, 1937 to mark the end of the uptrend. Then the index fell for three months to bottom on June 14, 1937 at 165.51 for a loss of 14.9%. It spent the next two months on a steady rise, finally hitting 189.34 on August 16, 2.6% below the previous high. That was his last hurray as the market plunged 49.1% to its March 31, 1938 Dow Jones close of 98.95.

1929

As in the 2000 market, the Big Crash of 29 gave many warnings. After going sideways for the first half of the year, the market went through a 10.0% correction when it went from a Dow Jones close of 326.16 on May 6 to 293.42 on May 27. Thereafter, it rose undaunted until it reached the market close of 381.17 on September 3. , 1929. It slid down, slowly at first, but then gained momentum to a low on Friday, October 4 with a Dow Jones close of 325.17, a loss of 14.7%. He made an insane effort to bounce back the following week, but only managed a close of 352.86 on Oct. 10. At 7.4% lower than the September high, this was the lowest percentage close to a previous high of any of the major bear markets. Moreover, this was the grandfather of all bears. Ten business days later, on October 24, the index closed below 300. It sank on Monday, October 28 and again the next day it closed at 230.07. The market continued its decline until it finally bottomed out on July 8, 1932 when the Dow Jones closed at 41.22 for a record drop of 89.2%.

Conclution

Historical data shows that every major bear market since 1923 always provided investors with a warning. After seemingly peaking, they went through a significant decline before climbing again only to plummet thereafter. In two cases, 2000 and 1929, he gave two warnings; the first a correction months before the peak and the second after the peak.

The declines after the initial peak ranged from 14.9% to 4.3% with an average of 10.8% and a median of 11.6%. In three of the nine cases, 2007, 1973, and 1946, the second peak was lower than the first. The range was from a 7.4% loss to a 2.9% gain with an average of -1.4% and a median of -1.7%. Taking the outlier of 1929, 7.4%, the average was -0.63% and the median -1.6%. The time between the two peaks ranged from 30 days to 5.4 months with an average of 96.7 days and a median of 93 days.

Starting from the premise that we are in the initial stages of a major bear market, and having gone through a 10% correction, what awaits us? Examining the data, it turns out that we are average. There appeared to be no relationship between the severity of the bear market and the time span between the two peaks. However, five of the six times the market went through a bona fide correction, 10% or more, it took months, between 2.9 and 5.4 months, for the market to peak and begin its slowdown in earnest. The notable exception was the Crash of 1929, which only took 37 days between the first and second peaks. Although there was no consistent pattern for the depth of the initial decline and the total decline, it is notable that the four largest initial declines led to declines of 49% or more, a level only reached by the 1973 bear market after only one decline. 4.3%. There is no discernible relationship between the initial decrease and the second maximum level, nor the total decrease and the second maximum level.

It could be that Morgan Stanley’s prediction on Monday, that a slowdown is coming from the second quarter, is correct. We’ve already passed the -7.4% level since 1929, so it seems this market doesn’t correlate as well with that one and the wait until the next decisive peak will be measured in months. Regardless, I would warn everyone to watch the market advance very carefully. If the S&P 500 is within 2.6% of the high of January 26, 2872.87, that is, 2798, that is your signal to exit the stock market. There is no point in being greedy with the last 1 or 2 percent gains and risking losing much more.

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