Are We Setting Up for Another 1987-Type Crash?Gains Pains & Capital 1 hour ago
October 11, 2021
Are We Setting Up for Another 1987-Type Crash?
By Graham Summers, MBAOver the last few weeks, I’ve been outlining the clear evidence that stocks are in a bubble, arguably the largest stock market bubble of all time.In truth, however, it’s not just a bubble in stocks, it’s a bubble in Treasuries, which the Fed has manipulated to absurd levels via over $2 trillion in Quantitative Easing (QE) during the last 18 months.These bonds are the senior most asset in the current financial system. Their yields represent the “risk free” rate of return against which all risk assets (including stocks) are valued. So, when the Fed created this bubble in Treasuries, it was creating a bubble in Everything, which is why I call this the Everything Bubble.Of course, this begs the question… when will it burst?Put another way, when does THIS happen?
Predicting the actual week, let alone the day, of a market crash is all but impossible. However, there are certain key developments that MUST happen for the market to crash.Think of them as BIG warnings, or the FOUR Horsemen that precede a stock market apocalypse.What are they?The most heavily weighted companies began to break down badly.Technically, the S&P 500 is made up of 500 companies. However, each of those 500 companies don’t receive the same weight from the index. Rather, certain companies receive a disproportionate weight giving them a much larger impact on the market’s price action.Because of this, in order to get a crash, you need the heaviest weighted stocks to break down badly. Even if most of the 500 companies in the overall market are in a downtrend, if the heaviest weighted stocks DON’T break down, it’s pretty much impossible for the overall market to crash.I’ll outline precisely how this played out before the 1987 Crash (arguably the worst single-day collapse in stock market history) in tomorrow’s article.
In terms of knowing how to invest during a bear market/ crash, I use my Bear Market Trigger.If you’re unfamiliar with the Bear Market Trigger, it has caught every major bear market in the last 20+ years.I’ve identified the previous signals on the chart below. Using this trigger you’d have avoided 90% of the carnage during the Tech Bust and the Great Financial Crisis of 2008.
We came darn close to triggering this signal during the 2020 meltdown, but managed to just avoid it by the fact that stocks closed April 2020 up. Had April been a down month we would have a confirmed signal.
How does this signal work? And is it close to triggering a new signal?