Market crashes should not be a surprise

Oct.12, 2008 in Market Outlook

They don’t happen out of the blue or just because. There are a serious of events over time that lead to such an event.

If you look at history, the market had typically ran up substantially before a major decline. This was especially true in 1929, 1987, 1997, 2000, 2008.

For example, the market was up 500% before the 1929 series of crashes.

I do argue that today, there are many stocks in the market (such as financial) that have lost 50-90%+ of their value over the last 12 months. This is what I call a worse case scenario - a “Sliding Crash.”

A “Sliding Crash” is a term I coined on or about 2001-2002 to explain the slow but continued downward movement of a stock price, and a market.

The market ran up sharply from 1990-2000 with a few blips, corrections, recessions, but trended sharply higher. Then the market tanked for good reasons (another story) from 2000-2002. This was not a crash since it did not happen in a single day, but I argue, it was a “Sliding Crash,” as it produced some of the same downward pricing effects as a crash, but over time.

1929 was a good example how a down fall continued over a period and not a single event.
http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929

This was also true in 1974-75, and 2000-2002 Bear Markets. You can cite any period where stocks tend fall sharply over time.

I don’t know were you read the story that the gov predicted these events, but i can tell you with 100% certainty, that the gov has a history of not being able to predict anything correctly.

The 1987 crash then was due in large part to program selling, and a huge run up in stocks prior. The market had a sharp drop in the Summer of ‘87, which should have been the waring that something is not right in the market.

Post 87 Crash led to trading collars in the market what effectively slows electronic program buying and selling. It is entirely incorrect to say that the market “shuts down” due to selling pressure.

There are trading halts in securities whenever they are order imbalances and news pending. This is not a market shut down. http://www.sec.gov/answers/tradinghalt.htm

One old example when the market has actually shut down was in 1914, after a 4 month closure following the end of WWI - (World War I). The market reopened down about 24% which had to account for the risk of that war.

In modern market times, the was the 1997 mini crash that started in Asia.
http://en.wikipedia.org/wiki/October_27,_1997_mini-crash

The market was also closed briefly following “9-11″ and tanked on reopening to account for the risk of that event. However even that was not a market crash.

Closing free markets historically has been a bad idea. In EVERY case, the market tanked (fell sharply) upon reopening.

This was not some conspiracy. I have been in the markets for 19 years and first flagged this potential financial disaster back in 2004 when the FED began raising rates (17x in 2 years driving the Fed Funds Rate up 425% in that period).
http://en.wikipedia.org/wiki/Federal_funds_rate

The FED raised rates for all the wrong reasons (”inflation”), and that was 1/2 the reason why the market is doing what it is doing now. See my post history.

The current risk to the market and U.S. and global financial system is huge, unlike we have ever seen.

In Jan 2008, the market had it’s worst performing month since 1936. When you compare to today’s events with major disasters in market history, you should know you have a potential disaster on your hands.

To say the market will never crash again is completely nutty.

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