Market Crash Warning – The Trap Door Has Opened
I love reading about all the good news in the market. This past week, we saw U.S. jobless claims dip to 211,000, and they are now near half-century lows. We also saw U.S. consumer sentiment reach a 15-year high. So, what could go wrong?
Well, as Professor Hernan Cortes Douglas, former Luksic Scholar at Harvard University, former Deputy Research Administrator at the World Bank, and former Senior Economist at the IMF, noted:
. . . financial markets never collapse when things look bad. In fact, quite the contrary is true. Before contractions begin, macroeconomic flows always look fine. That is why the vast majority of economists always proclaim the economy to be in excellent health just before it swoons.
Moreover, the fact that consumer sentiment is hitting major highs is often a warning to the financial markets.
As Alan Greenspan also noted:
The cause of economic despair, however, is human nature’s propensity to sway from fear to euphoria and back, a condition that no economic paradigm has proved capable of suppressing without severe hardship. Regulation, the alleged effective solution to today’s crisis, has never been able to eliminate history’s crises.
And, when the market made a new all-time high in April, and some of the major banks and analysts were still calling for a “melt-up” to begin at that time, it seemed quite clear we were hitting euphoric levels, especially with the market rallying non-stop off the December 2018 lows.
In fact, when AAPL hit the 215 region on the first day of May, many thought me crazy for shorting it at that time, especially when it was hitting those highs after what was supposedly a phenomenal earnings announcement. But, that has been one heck of a profitable trade for which I was supposedly crazy to enter.
Indeed, we were seeing points of euphoria throughout the market.
I have also seen many note that one cannot foresee a black swan event which “causes” significant market declines. While they may be correct in suggesting that one may not be able to foresee an “event” before it occurs, but markets do not crash without warning. Rather, one needs to have a set up in place before that occurs. As Ralph Nelson Elliott correctly noted:
At best, news is the tardy recognition of forces that have already been at work for some time and is startling only to those unaware of the trend.
And, currently, the market is setting up in a manner which can shave off hundreds of points in a very short period of time. While I cannot guarantee this will happen, as life offers no guarantees, I can alert you to the fact that the set up for such a decline is now in place. And, should some news event hit the wires to seemingly “cause” the market to drop precipitously over the coming weeks, please do not tell me this was a “black swan” event which was unforeseeable. The set up is currently in place.