The Coming Stock Market Crash

Trading floor after crash

There is an uncanny resemblance to the stock market today and in 1973, where the market proceeded to drop around 50% over the next 18 months.

In the chart below we can see that both the Dow and the S&P 500 could be tracing out an A-B-C-D-E correction in the shape of an expanding triangle. D wave which started in Mar 09 peaked at the end of Jul 13/early Aug 13. We expect that the next leg down has already started .

INDU 29-08-13 2000-2013

S&P500 21-08-13 2000 to 2013 iNote the similarities with the 1966 to 1974 bear market. 1966-1974 correction was a cycle wave 8 year formation.
S&P500 21-08-13 1966 to 1974 i

Looking at the long term chart from 1900-2013, we can see that we Supercycle Wave (III) topped in 2000, and it is Supercycle Wave (IV) which is currently in progress. Supercycle Wave (II) was a sharp zigzag, so Supercycle wave (IV) should be a sideways correction which it is based the expanding triangle formation as described above.

INDU 1900-2013 Supercycle Top i

 

Aug 2013 – ?? So how long will wave E last this time round?

Looking at history wave E will last the longest and be a 5-wave affair. The entire formation this time round is of a larger degree than in the 1966-1974 period so the correction will last longer. The 1966-1974 correction was of cycle degree, and we see this correction to be at least of supercycle degree. The wave E from 1973-1974 lasted from Jan 1973 to Oct 1974 ie 20 months.

We would look for wave E to last at least 1.5x -2x as long as this, given waves A to D from Mar 2000- Aug 2013 took over 13 years which is twice as long as the 1966-1973 waves A to D.   So expect to see a bottom only around 3 years from now in the second half of 2016 at the earliest. It terms of price targets we would not expect to see a bottom until the Dow drops below 6000 and the S&P500 below 600.

How should we position ourselves? 

Ideally, the right way to structure your portfolio will be to exit all risky assets. ie stocks, bonds, commodities and real estate. And hold cash, USD assets, and US Treasury Bonds. Emerging markets will be hit the hardest as capital flees back to the safety of the USD, and other safe assets.