The Next Stock Market Collapse: Are we There Yet?

April 3, 2016

It seems that we are entering a decisive period for the stock market. The S&P 500 is right at the top of a channel between 2,100 and 1,920. Although I don’t like technical analysis, it is pretty clear that if it rises significantly about 2,100, then a new bull market will start. Conversely, if it drops below 1,920 a major market crash may follow.

S&P 500 10 Year Chart

S&P 500 10 Year Chart

Although anyone with limited knowledge of technical analysis would come to the same conclusion, I imagine 100,000,000 would-be retirees don’t look at this chart. And even if they did, they would not be able to see its importance.

I have been studying the S&P 500 on a daily basis for the last few years, and noticed a few interesting distinctions. One such distinction is that I don’t think it is possible for anyone to make accurate predictions such as:

In November 2016, the stock market will crash.

There are too many variables. However, when a market goes straight up like the Dot-com Bubble, or the Shanghai composite 2014-2015, it’s very likely that there will be a crash. You just don’t know when.

The major distinction I made is that although we don’t know when the crash will happen, we can predict two important pieces of information:

  1. What is the probability of a crash?
  2. If it does crash, how much it would go down?

The higher it goes and the shorter period of time, the higher the probability of crash. And, the higher it goes and the shorter the period, the more it will go down.

Bubble Run-Up Duration Crash
Dot-com 5x 5 years 75% drop
Shanghai Composite 2.5x 1 year 40% drop
S&P500 2016 2.5 x 5 years ?

As you can see, the scale of the last 5 year bull market has been much smaller than the other two bubbles. So that suggests that a violent market crash may not occur.

It will be interesting to see how this market mystery turns out. I hope that the millions of people who would be affected by a market crash become aware of the possibility.