A wise man once wrote:
Markets top slowly and bottom quickly.
When I read this and anlyzed some of the major market tops over the last 100 years, I was surprised by the accuracy of this statement. (One major exception was the 2000 Tech Bubble, which was quite different from other market dynamics.)
The theory behind this is that the “smart money” figures out that a market is topping long before the average Joe. I’m not sure if I agree with the theory, but it does seem to me that the “stupid money” gets out way too late, after the market has dropped significantly.
As I write this on Jan 17, 2016, it reminds me of the would-be retirees in 2009 lamenting,
My 401K is down so much that I don’t even open my statements anymore.
I wonder how many have the sense to protect their life savings today. Probably not very many. Probably about as many that take the time to become financially educated and read books about trading and investing. This reminds me of the Foreclosure Crisis that I wrote about just a few short years ago.
What would cause a market crash now? I think the biggest reason is that we are overdue for a worldwide depression. Depressions happen once every 80 years, on average. The last Great Depression started in 1929, which was 87 years ago.
Another major cause of any upcoming financial crisis is the Chinese economy and stock market. The Shanghai market had a bubble and collapse last year, and is set up for another big fall:
This situation reminds me of something a friend of mine said in 1999. He said he would like to buy puts against the Nasdaq. If he had, he would have easily made a 10x in a few months.
Does that sound incredible? Making 10x in a few months, when most people are making 1% per year (before inflation)? It is incredible for those of us who don’t understand how markets work. But it is very doable for people who are experienced traders and can see opportunity in the form of a chart.