Stock Market Crash Probable

Estimates vary, but HFT black-box computer trades may account for 50% of all stock market trades, and they were a significant factor in crashes as old as 1987 to as recent as 2010’s flash crash. They are designed to act in the market before humans can, and hence their collective action can at times compound and trigger very fast, large price moves. Circuit breakers are now in place on the stock indices, designed to close the market for anything from 15 mins to the rest of the day, depending on the depth of the declines. They don’t prevent further selling once the market re-opens – they are designed to give time to reconsider, but the predominance of crash days on Mondays suggests time to reflect may in fact increase fear.

The May 2010 flash crash was initiated with a large sell order set against an almost complete absence of buyer orders, then multiple and successive trigger sells. The algorithms used in computer trading vary, but they include mean reversion strategies, trend following and stop-losses. Recently we have built up a significant range of extremes from means, including sentiment, valuations, leverage, distance above moving average and time without a significant correction. Thursday and Friday last week provided price action to break the uptrends in multiple indices and stocks.

Here is a compilation of indicators that reveals the same signals are in place now as were at the May 2010 flash crash. Click to view larger.

FlashCrashBackdropComparison

26ja9The backdrop now mirrors the 2010 crash backdrop, only this time round we reached greater extremes in all seven indicators. This suggests another crash is probable, and the depth of the crash likely to be larger. Drawing on those historic topping process parallels, it is possible buyers and buy programmes re-emerge this next week and it is still a bull-bear battle, but with a downward bias, pushing true market crash action out into February, March or even April. However, Friday’s one-sided price action together with the predominance of historic Monday crashes and the mirror backdrop to May 2010 (only more extreme in all signals) gave me a sense of urgency about putting this out today.

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29 thoughts on “Stock Market Crash Probable

  1. Into May 6 2010: CDS rose sharply for the PIIGS and the Euro was under pressure; Yen spiked against the US dollar pre crash
    Jan 23-24 2014: CDS rose sharply for emerging markets and emerging market currencies fell sharply; Yen spiked against US dollar

    Looking at cross-asset performance under the 2010 flash crash, gold rose 2.5% and had a strong day, as did treasuries, with yields dropping 5%. Crude oil dropped 0.8% for the day, but joined equities in having a tough May dropping overall 30%.

  2. Lucid, as always, and timely. Thanks John.

    Don’t have any basic analytical capabilities myself, which is why I follow a few people like yourself, who have demonstrated their skills.

    Also not a trader – punting budget destroyed by being too early for the crash in 2007! – but shepherd a modest amount of institutionally-managed superannuation (in Australia) and moved it from cash to ‘diversified bonds’ (as the only available proxy for the US 10-year bond rate; highly imperfect) a week and a half ago.

    Do you see a real possibility here that we could have a severe stock market downdraft for maybe two weeks, then a new high (new highs) before a resumption of the downtrend?

    Thanks for whatever you have to say. I’m not seeking something definitive(!), but more a general response … some philosophers reckon (or, if they don’t, they should) it can be difficult to state something meaningful unless you have a question or proposition to react to. You must be a fair sort of philosopher, going on your writings…

    Regards
    Malcolm

  3. All the indicators, you put together, are powerfull enough to expect something like a crash scenario. In addition the necessity of hedging a big amount of sold out-of-the-money call options on the us volatility future by selling us index futures could kick off and reinforce snowball selling of stocks next week – http://www.schaeffersresearch.com/commentary/content/ezines/are+we+headed+for+a+snowball+sell-off/mondaymorningoutlook.aspx?id=119518

    Maybe this “delta-hedging” was already part of the reason, why the US-Indices gave the impression of slicing through various support lines like butter on Friday.

    Should this outcome be prevented by an immediate buying spree on Monday, I see the most favourable course for the bulls in a scenario like that in the months following Feb 23rd 2011. Over the last three years the preceeding fortnight was the only other period when the German Dax, reknown for its excesses stood 14 % above ist 200 dma for more than 3 days in a row. In 2011 the sequence was even longer and stronger (up to 15%) than today. But obviously some of the other indicators you mentioned were less extreme then than they are now.

    Thanks again for your timely and well founded warnings, almost standing alone in a crowd of sun blinded comments.

  4. John,
    In previous posts you have indicated that, prior to a huge market decline, there is a parabolic market high. The market declines but a few weeks later there is an echo bounce that fools investors. After the echo bounce,there is a steep waterfall drop in the market.
    Do you expect this scenario to play out again?
    In other words, can we expect a bounce in the market after this correction that the market is currently undergoing?
    Do you expect the echo bounce to carry the market to new parabolic highs before the real market waterfall drop begins?
    Jack

      1. By the way were coming to the end of the year of the Snake. It may 2014 on one calendar, but still the same year in another.

  5. My bond charts support John’s posting about the record low bullish consensus in bonds.Added to the post at LONG TERM .Please note the one caveat remaining that might return bonds a marginal new low.

  6. If the crash actually happens, an interesting aspect. The 1987 and 1929 crashes saw the starting point of the final leg up as as approximately the half way point of the decline. In 1929 the Dow topped @ 390 and fell to 190. The start of the final rally and halfway pt was 290. In 1987 it was a top of 2750 and bottom was 1620. The starting point of the final leg was 2250. The bottom was a little further than the 500 pt last leg and half way pt. The final leg up in this mkt was 1868 points which translates to a loss of 3726 or 12,862 so if you see around 13,000 cover. That would also essentially wipe out all of last years gains! Not likely, but worth watching. The lunar eclipse is April 15 which seems a little too far away for a crash bottom. In addition, the solar eclipse is after the lunar which is not typical of a Puetz crash sequence.. However, if we get a failing partial recovery after a 10% or more initial decline, I’m betting the farm.

  7. A brief article which might be of interest to those like wxguru and eclectic who have been looking at planetary influence on the sun: http://tallbloke.wordpress.com/2014/01/24/nicola-scafetta-planetary-harmonics-derived-forecast-on-course/

    There is an increasingly heated debate going on between those who believe that planetary cycles influence the sun, and those who don’t. This article provides some further evidence that there is such influence (and in this case that it consequently affects temperatures on earth).

    Also, a quick glance at the graph illustrates the laughable way the scientific “authorites” (in this case the IPCC) can make predictions.

    Global warming and solar cycle predictions by the established authorities are persistently being proven wrong, while nature continues to side with the planetary “cyclomaniacs”…

    1. I actually have encouraged Dr. Scafetta to monitor this site. I introduced myself late last year. He has calculated a set of equations and I think they may help describe a scientific algorithm for the Bradley. However I haven’t done any apples to oranges comparison yet. Ultraviolet band of electromagnetic radiation varies significantly enough during solar cycles and has been proven to alter the stratospheric layer of the atmosphere. This is where most clouds and water vapor reside. Water vapor as a gaseous form is susceptible to electromagnetic radiation. The gases trapped in the water in our oceans is also affected. One thing I can tell you as a computer programmer is weather models are not perfect. Software bugs do exist in them more then most think. Tallbloke’s site is where I first saw extra info on the overlapping polarity of the sunspot cycle explained by planetary alignments. There is no mystery to it if you dig deeper into the physics of how gravity and light work (light being electromagnetic radiation (visible spectrum) aka photons. Throw angular momentum into this mix and it all clicks. Developing this for the masses in a easy to chew, consume and swallow, is different. I got into solar cycles because I never believe any of the crap they spewed only to then discover the connections John made before finding this site.

    2. How about John H Nelson’s Theory of Radio Propagation. I considered planetary influence on the sun an established fact. I read once that looking at the solar system from the outside, it looks like a generator. Th sun is very liquid (plasma) and to think Jupiter and Saturn’s gravitational pull whirling around out their doesn’t have an influence is absurd.

    1. algo:

      The reasoning or rationale as the basis for financial astrology? I see your site also uses this phrase. The problem I see is that none of the books on financial astrology has really convinced me of any science to this type of thinking. While the markets cannot be explained by pure science (imho) there indeed can be general tendencies
      in various cycles. The FA analysts then use whatever random cycles are occurring (always some non-periodic cycles: just consult an ephemeris) to then confirm their
      pre-conceived and biased convictions. Did I miss a description or explanation of your methodology? I happen to agree with your assertions since contrary opinion is not about sentiment per se but rather on how investors have acted with their money. Below, I have also posted a good blueprint (charts of the SPX) which meshes with your views. Cheers.

      http://www.thetwelvesigns.com/celestialblog/?p=296

      http://www.safehaven.com/article/32453/weekly-technical-analysis

    1. I have been gradually adding to shorts and putting stops on the ones far enough away from the price action. My biggest target is the R2k, as it is the most overvalued and by history the most liable to retrace all its gains of last year.

  8. I find this particular chart instructive. Those looking for market declines should be following this closely. Will need a VIX weekly close above the 200 week Moving Average before any fireworks, in my opinion.

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