The Coast Is Unclear: Signs of an Imminent Major Stock Market Crash
Despite the recent fix, and regardless of what popular metric you use; PE, the Shiller CAPE index or the comparison between the market and Buffett’s 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. Incidentally, 1923 was the year the “Composite Index” was introduced, the forerunner of the S&P 500.
The record shows that while stock prices can continue at elevated levels for a long time, they eventually mean-revert. That can happen in one of two ways. Either the market goes sideways for a long time until earnings recover, or there is a sharp drop for prices to line up with historical PE indices, a mean reversion. History has shown that investors are not a patient group. They will put up with a sideways market for a while, but eventually they will tire of poor returns and put their money to work where they think it will generate the most profit potential. Once the ball gets rolling, the market goes out in droves and a severe bear market takes hold. The result: a big market crash is looming.
The question is when and if this past correction was a setback or a prelude to the big drop. A study of 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 lead to every major bear market. Some people are under the mistaken impression that stock market crashes occur at market highs. That is far from the truth.
The stock market may well be fickle, but providence is kind. It always gives us advance notice of a coming crash, grabbing our attention amidst our complacency with a surprise drop and giving us a chance to get out before it crashes in earnest. This is shown in the analysis below for each of the following major bear markets (28% down or more): 2007, 2000, 1987, 1973, 1968, 1962, 1946, 1937, and 1929. Intraday prices and closes Daily dates are only available for the S&P 500 from 1950 onwards. Therefore, the Dow Jones Industrial Average closes were used for markets before that.
2007
The initial market high of 2007 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 1370.60 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 rally for seven weeks to reach a market high for the index of 1576.09 on October 11, 2007, up 1.3% from its previous high. An initial drop of 5.5% was followed by a quick recovery to 1552.76 on October 31, before succumbing and falling 10.8% to a low of 1406.10 on November 26, 2007. The index it would recover to a high of 1523.57 and continue in a series of lows and highs to its lowest point of 666.79 on March 9, 2009 for a drop of 57.7%.
2000
The 2000 market gave many warnings before the Dot.com crash. The market stumbled just after opening the New Year on January 3. After peaking at 1,478, the S&P 500 fell to 1,455.22 at the close. It fell below 1400 the next three days and recovered to 1465.71, the high of January 20, 2000. From there, it went down in a rollercoaster to the low of 1329.15 of February 25, a drop of 10 .1% from its maximum so far. The market finally climaxed 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 went down steadily with some steep declines followed by rallies, but only as far as the downtrend line. The market bottomed out at 775.80 on October 9, 2002 for a 50.1% drop.
1987
The bear market of 1987 was fast. After faltering 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 stumbled to a close below 300 on Oct. 15 before collapsing the following Monday to close at 224.84, a 20.5% loss for the day. It would close lower on December 4, 1987 at 223.92, but the trough of the move came the day after the crash, on October 20, when it fell to 216.46 for a 36.0% loss from the August high.
1973
This, along with the 1968 bear market, was part of the mega bear market that lasted from 1967 to 1982. The S&P hovered in the 100-110 range for most of the year. It topped the 110 barrier late in the summer only to dip below it again before making its final surge to close out the year. 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 high of 121.74 on December 11 January 1973, a gain of 1.6% from the previous high. It quickly fell to 111.85 on February 8 and then proceeded to hurtle down through a series of bumps until bottoming out at 60.96 on October 4, 1974, a loss of 49.9%.
1968
After an initial drop to start the year, the market rose steadily from March through November, finally topping 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%), faded on its rally to within 0.43 point of the March 17 low, and then rose to 106.74 on March 14, 1969. May 1969. After reaching 2.4% of the top it finally succumbed hitting the 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, finally reaching a high of 71.44 on March 15, 1.7% below the high. Thereafter, the index plummeted to 51.35 on June 25, 1962 for a drop of 29.3%.
1946
The market had been on the upswing since the latter part of World War II and started 1946 the same way gaining 8% in February. The intraday highs and lows of the S&P 500 were not available for analysis, so the Dow Jones Industrial Average closes will be used from here on out. 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 regained its previous high and sped past it to 212.5 on May 29, 1946, a gain of 2.9%. from its previous maximum. The bumpy ride continued into August, when the index hit 204.52 on August 13 and then fell exhausted, finally closing at 163.13 on October 9, 1946 for a drop of 23.2%. Despite several attempts to rally, the market would continue to struggle until February 1948 with a maximum loss of 28%.
1937
After a precipitous decline from 1929 to 1932, the market seemed to be in recovery mode until it leveled off in early 1937. The Dow closed at 194.4 on March 10, 1937 to mark the end of the uptrend. The index then fell for three months, bottoming out on June 14, 1937 at 165.51 for a loss of 14.9%. It spent the next two months on a steady climb, finally reaching 189.34 on August 16, 2.6% below the previous high. That was his last hurrah as the market plunged 49.1% to its close of 98.95 on the March 31, 1938 Dow Jones.
1929
Like the 2000 market, the Big Crash of ’29 gave plenty of warning. 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 steadily to reach the market closing high of 381.17 on September 3. , 1929. It fell lower, slowly at first, but then gained momentum until reaching a low point on Friday, October 4, with the Dow Jones closing at 325.17, a loss of 14.7%. It made a huge effort to rally the following week, but could only manage a close of 352.86 on October 10. At 7.4% below the high, this was the lowest September percentage near a previous high of any major bear market. Then again, this was the grandfather of all bears. Ten trading days later, on October 24, the index closed below 300. It broke away on Monday, October 28, and closed again the next day at 230.07. The market continued its nosedive until it finally bottomed out on July 8, 1932, when the Dow closed at 41.22 for a record drop of 89.2%.
conclusion
Historical data shows that every major bear market since 1923 always provided investors with a warning. After seemingly peaking, they experienced a significant decline before rising back up only to plummet thereafter. In two instances, 2000 and 1929, he gave two warnings; the first a correction months before the peak and the second after the peak.
Declines after the initial peak ranged from 14.9% to 4.3% with a mean 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% median of -1.7%. Taking out the 1929 outlier, 7.4%, the mean was -0.63% and the median -1.6%. The time between the two peaks ranged from 30 days to 5.4 months with a mean of 96.7 days and a median of 93 days.
Proceeding from the premise that we are in the early stages of a major bear market and having gone through a 10% correction, what lies ahead? Examining the data, it turns out that we are in the middle. There seemed to be no relationship between the severity of the bear market and the length of time between the two peaks. However, five of the six times the market went through a bona fide correction of 10% or more, it took months, between 2.9 and 5.4 months, for the market to top out and begin its decline 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 drop and the total drop, it is notable that the four largest initial drops led to drops of 49% or more, a level only reached by the 1973 bear market after a drop of only 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 this Monday, that a slowdown is coming from the second quarter, is correct. We are already above the -7.4% level of 1929, so it looks like this market does not correlate as well with that one and the wait for the next decisive peak will be measured in months. Anyway, I advise everyone to watch the market progress very carefully. If the S&P 500 is within 2.6% of the Jan 26 high of 2,872.87, or 2,798, that is your signal to exit the stock market. There is no point in being greedy on the latest 1 or 2 percent gains and risking losing much more.
