Is stock market crash a self-fulfilling forecast?

The Hindenburg people are really coming out of the woodwork, don’t you think? That means one of two things. A crash really is a self fulfilling prophesy or since too many people are expecting it, that automatically rules it out. I never put too much stock in it because I think crashes are rare events and it takes more than a reading that measures highs and lows in the market to cause a panic. But the attention it’s getting is noteworthy.

In this business, you can never rule anything out but what we can do is manage probability and uncertainty. Curtis Faith points out the emergency room doctor can do everything right and the patient can still die. But let me say this about a crash. Could we all agree that a crash is caused by a panic? Isn’t a panic caused by everyone being taken by surprise when they all head for the exits at the same time? Way back when, before they had satellites, hurricanes used to rip into the coasts and kill thousands of people. I can’t imagine to even have the slightest understanding of the panic that materialized. I suppose the closest thing we can compare it to was the tsunami in 2004. But when we see an Andrew or Katrina coming we can prepare and avoid a panic. Disaster still hits but the panic is avoided because we see it coming. Can we draw the same analogy with the Hindenburg Omen?

I believe that only the smartest of the smart saw 2008 coming. We were told the sub prime mess was contained and a week before disaster struck, one of the Presidential candidates told us the US economy was sound. Who expected the economy to implode and almost go down like the Titanic?

That was more like Galveston in 1900 than Katrina in 2005. Don’t get me wrong, as bad as Katrina was, more people lost their lives in Galveston.

All of which brings us to the current situation. As we come to the end of August, my mantra for the month was to observe and digest any clues the market might be giving us. It was a month of mixed messages. Well, it’s not done but we are coming up on the slowest 2 weeks of the year except for Christmas and I will be on vacation next week so I need to speak my mind now. First of all China and Europe did much better. In May and June those were the problem children and it appears we’ve put those crises in the rear view mirror. So all should be well, right?

Not exactly. Lately I’ve seen a minor shift where our markets would respond to what materialized in China about a day and a half later. Now China is starting to respond to what we are doing. For those of you who were worried that China was taking too much of a leadership role, aren’t you glad?

The reason everything is starting to take a back seat to us again is the banks. Let me spell it out for you. I’m really concerned about the banks again. For those of you who keep score of such things, the BKX topped on July 13 while the rest of the market did so either on August 4 or 9th. At first it appeared the housing index was dragging banks down. But lately housing has behaved slightly better but the banks look like they don’t need any help, thank you very much!

Now we are in the unenviable position where the BKX has made a new low for the cycle off the April top. You know what I keep telling you about the banks. I’m going to be consistent. In January while the rest of the market was falling like a rock, it was the banks that were somewhat neutralized and didn’t confirm. I told you nothing bad happens to the market while the banks are not confirming the downtrend. The market caught a second or third wind (I stopped counting) and continued higher into April.

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