Crash Signatures

If you have been a long term reader here you know that I have something called a 'Crash Signature.'

One of the key components of this is a significant decline from a new all time high, that rallies substantially so that the fear subsides and most believe there is a return to 'normal' bubble conditions.

Unfortunately, IF this is a rally that fails, in that it fails to set a new high, but tops out and then falls sharply again, we have a higher potential of a crash in which confidence is shattered and a new lower low is set.

I have a correspondent in France who also does trend tracking such as this. While I have normally been using a composite model of several crashes from US market history (1929, 1974, 1987, 2001, 2008) he is concentrating lately on a comparison to the year of 1937.

It should be noted that the 'crash' of 1937 pales in comparison to the Crash of 1929. And it was largely caused by an egregious policy error by the Fed.

If you look at it carefully it does follow the 'crash signature.'

Here is the latest chart which he has sent to me. I think if we fail once again to take out 'The Wall' on my SP 500 chart, and drop to a lower low, there will be a higher than normal probability of a 'crash.'

Although I have to add that we are in the days of organized support, and mobilization of the entire country's money mechanisms, to support stock prices for the benefit of their primary constituents.

The next few months could be memorable.

The Current Financial Asset Bubble in the DJIA - The Rake's Progress - 2001 Crash Metals Performance

My friend who has been creating this chart below seems rather exercised by the correlation. He has lots of charts showing the math behind it, and so forth.

What it says to me is that we are at a financial asset bubble top, which appears to have crested.

The old short seller in me knows that the resolution of this depends on what happens next.

While the 'signature' looks rather good, it must be confirmed by a market break, and then a failure of the powers of the financial system to rescue it.

I have been here many times before in the past forty years of trading.

A bull market makes everyone feel like a genius; a bear market crash brings them back down to their knees. Most investors and traders would do well to preserve what they have.

I have taken precautions for myself. You may wish to do the same.

But I am not yet actively shorting the market. This may say more about my current conservative stance towards trading.

In the early 2000's I would have been playing this to the downside, aggressively in-size and short term, in the futures markets.

But that is a younger man's game.

At some point we may see the safe havens come back into vogue. But it appears that is not yet the case.

In a general panic everything gets sold in a liquidation for the short term.

The only difference is the distribution of pain, and the speed at which some assets may rebound.

I include a relevant example from the 2001 crash below.

William Hogarth, The Rake in the Gambling Den Begging For God's Assistance