Is this really the ultimate crash indicator?
If you’ve been watching the headlines this week, you’d sure think so.
Before Friday’s jobs report sent stocks higher, one bit of research went as viral as a financial article can.
As you might expect, it played right into the fears of many investors.
There’s one thing they don’t say, however, that really negates it all.
Let’s have a look.
A Trend That’s Not A Trend
The stock market has been in a slide over the last two weeks.
The slide has been remarkably consistent too.
In the nine trading days leading up to August 3rd, the Dow was down on eight of those days.
A run like that is enough to trigger anyone’s emotions, even the most data-minded analyst.
Well, one researched the history of an 8-for-9 downswing and came up with some ominous results.
You see, there have only been a handful of times the Dow has fallen that consistently. Each time it was followed by a bear market or a crash.
The chart below shows each time it happened in the last century:
The areas shaded circled in red are when the Dow fell eight of nine days.
By the looks of it, there were some pretty big crashes or bear markets which followed nearly every time.
The Great Depression of 1921 (that was the “Great Depression” before the real “Great Depression” started later in the decade), the 1987 crash, the dot-com bust, and the credit crisis were all preceded by the Dow dropping for eight out of nine days.
This alone would say a crash or bear market is next.
However, it’s not alone. Not by a long shot.
The factors preceding all those bear markets or crashes were quite specific.
The 1987 was driven by a derivatives meltdown.
The rise of computer-driven “stock insurance” trading plans led to the mass exodus of stocks in 1987 when all the sell orders were triggered at the same time.
It was the “flash crash” at the speed of 1980s computers.
It’s not alone though.
The dot-com bubble was pure euphoric madness. Once it turned down, a major correction back to reality was inevitable.
The credit crisis too. A slight drop in the Dow didn’t cause the trillions of dollars of inflated housing values to disappear. Quite the opposite in fact.
The current market is a much different situation than those too.
Central banks have taken unprecedented steps to inflate an asset bubble in hopes it will lead to economic growth.
It never has before.
It won’t this time.
It too will end, but not until massive distortions and profitable speculative opportunities are created from it all.