The Crash Of 2007. we are in the midst of a stock market crash, the first since 2002
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The Crash Of 2007.
Clem Chambers, ADVFN 08.06.07, 5:00 PM ET
There is a really high probability that we are in the midst of a stock market crash, the first since 2002. This is a ridiculously dangerous prediction for a commentator to make.
There can be no certainty in calling a sharp movement, particularly one as wild as a "proper crash," which, depending on your point of view, is a 20% or 25% fall in the markets from their highs. Corrections come and go, and recently they've been coming with increasing frequency. However, a correction is a burst of stock market indigestion that soon passes and is forgotten. Although 5% to 10% moves are frightening, they don't change the basic picture of the investment climate.
In Pictures: 12 Safe-Haven Stocks
It is, of course, easy to suspect the oncoming likelihood of a crash at the pit of a correction; in a sense, that doom-laden vision is a strong indicator that the bottom has already been reached. Utter despair is at the point when all the selling is over, and dreams of doom are usually a sign that the turning point for good news has arrived.
That is at least a common hope. However, the current move has many of the hallmarks of a crash; one that would see the S&P 500 down to around 1,200.
For a perma super-bull like me, it is most distressing to see a high likelihood of an impending dislocation. I would happily accept the prognosis that the market was OK and that I should get a prescription for Prozac instead, but to me the chart and the markets' behavior is flailing about like Robbie the Robot crying "danger danger."
The charts are utterly horrible. Both correcting and crashing markets go into the same nose dive chart pattern, so initially there is nothing to distinguish them. The next key point is the bounce. This bounce defines either the bottom or a halfway point. If the bottom is established at the initial level of the first bounce, a "W" formation will be created over the next week or two, followed by a medium-term climb back.
In Pictures: 12 Safe-Haven Stocks
The W shape is everywhere, while a snap back V shape is extremely rare. The S&P has just broken out through the first potential W form and is heading down another 5%. That's nasty enough, but if it was to break again from there, we're suddenly looking at 1,200 as the next stop. That would really be very bad indeed.
This of course is all chart mumbo-jumbo, a pseudo science that makes me trading money but that can't really be justified, at least not without page upon page of flamboyant exposition. Real crashes are usually the outcome of the invention of new financial instruments or the discovery of new places or ways to trade. Unregulated, untried, untested, badly understood and prone to the predations of the slick and fraudulent, the markets for new financial instruments bubble wonderfully and then crash horrifically.
From tulip bulbs to 1929 through to Asian contagion and the dot-com boom, the bubble crash cycle can be traced back to novelty gone bad.
Hello there, trillion-dollar derivative debt markets. If in a couple of years time I'm writing a book called The Crash of 2007, the first chapter is going to be about how these marvelous new debt instruments ended up making a very large financial smoking crater of the world markets. There will be a large section on fraudulent dealings and how billion-dollar swindles were perpetrated and who got thrown in jail forever, who jumped off the skyscraper, etc.
You've read the book a dozen times before, and once again all the pieces of the plot are in place. But you don't have to look to the debt markets for the sole warning flag that something nasty is on its way. The China, Brazil and India markets just have to crash soonish. Markets that rise hundreds of percentage points in two or three years simply don't escape crashing. It's the law, or put another way, a high probability trade. Their crash is coming, whatever happens to U.S. debt.
Conspicuous consumption of "Giffen goods" like fine art is another telltale sign that the end is nigh. Interest rates up, European real estate values off the dial, the skies full of cranes, record art prices, zillionaire upstarts, bubble markets going up forever, all underpinned by leveraged trillion-dollar alien financial instruments suddenly melting like ice cream in front of their holders. Argh. Time to buy a compound up a mountain in the desert and load up on the dried food and firearms. Then again, perhaps not. So what to do?
First, if it's not already too late, drop all the leverage you have, dump anything you can't bear to hold for more than a year, get on a sailboat and don't plan to hit land for a few weeks. If you don't own a yacht, carry a thick piece of leather to bite on when you hear market news. Sanity will return shortly.
Then, when it does return, buy good stocks with the pre-prepared pile of cash. Load up with any blue chip that took a beating that you respect: companies with cash, profits and dividends. In a true crash everything gets pulled down pretty much in line with everything else, so there will be plenty of quality to choose from. You can finesse it, but there is little need after a crash, as there is normally such a broad selection of no-brainer purchases that the selection is cash constrained, not choice limited
Of course speculators can have a great time buying and selling, shorting, trading options and doing their high-risk stuff. Try not to be sucked in unless this is your joy. During a crash, many a small fortune will be made out of a large one, and trading volatility shouldn't be the focus for those building their wealth with a portfolio.
In Pictures: 12 Safe-Haven Stocks
Crashes come and go; the key question is going to be is the "bull market" over.
This will be revealed in the fall. If the market jumps sharply then fades away for a few days, then this correction/crash will have marked the end of the great bull run we've all enjoyed. If the cycle is small rises for a few days followed by sharp but short-lived falls, then we are in good shape; the bull lives. This really is the key question and not one I'm prepared to call.
I really hope I'm wrong about an imminent crash. We can all do without that kind of excitement, but investors should be prepared for a rough couple of weeks and be assured, whatever happens, that it's not going to be smooth. There have been 14 crashes on the Dow since 1901, depending on how you count, three in the last 10 years.
So it's not as if crashes are rare. Crashes come and go. The way to make money is to not be knocked out of the game by the collapse and to be ready to buy once they are over. So to my fellow investors: "Good luck, everyone."
Clem Chambers is CEO of stocks and investment Web site ADVFN. For free real-time stock prices go to www.advfn.com. E-mail: clemcham@advfn.com |
