A very large number of investors continue to be fearful about a stock market crash. The traces of the epic crash of 2009, aka the Great Financial Crisis, are deeply rooted in the psyche of investors. Is this fear justified? Only partially, is the answer of InvestingHaven’s research team. There are leading indicators of a stock market crash which is what investors need to look for. Consequently, only when these stock crash leading indicators are flashing red flags is it justified to get concerned about a real upcoming stock market crash. This article contains only 5 charts with which InvestingHaven’s research team tracks the likelihood of a crash. Moreover, it uses only these 5 charts with all their chart secrets to forecast when the next stock market crash will occur. Based on these charts combined with our 100 investing tips the next stock market crash will likely be in 2022. Between now and then investors better focus on getting maximum returns on the investing opportunities that present themselves!
Note: we wrote similar articles in the last 3 years. All of them were pretty accurate in forecasting that a stock market crash would not occur. Followers can check them out here: Stock Market Crash 2019 Brewing?, Stock Market Crash 2018 and Will The Stock Market Crash In 2017?
The Low Statistical Likelihood of a Stock Market Crash
One of the pitfalls for investors is to be flooded by the enormous quantity of content published on the topic of market crashes.
As always, quality goes above quantity.
If you look deeper into the number of real stock market crashes you will find out the likelihood of one to occur is extremely low. Wikipedia says that there are only 4 stock market crashes since 1900:
- Panic of 1907
- Wall Street Crash of 192
- October 19, 1987 (aka Black Monday)
- Crash of 2008–2009
Note that the 2000 dotcom crash does not qualify as a stock market crash. Why? Because it was only the NASDAQ really crashing. The other broad indexes corrected significantly but they did not crash!
Fear & Greed Is Neutral At The Time Of Writing
At the time of writing there is no indication whatsoever of a coming crash based on the Fear & Greed indicator published by CNN Money.
The million dollar question with this ‘indicator’ is what the predictive value of it is.
Here is our answer: the predictive value is very low.
It may reflect the current state. This may be good as an eye-opener for some investors who stick to their former viewpoint. However, this tends to reflect the positions in their portfolios.
However, this does not tell anything about the future.
What we absolutely need is a set of indicators which may predict, with a high level of confidence, the future.
Tip: Don’t Read Too Much, It Doesn’t Help
Consequently, how much research is required to predict when the next crash will occur.
We believe that’s horribly wrong!
Take for instance this article on The Guardian which is full of fundamental viewpoints. Try to read this and conclude anything about the timing of the next crash?
As per our investing tips:
‘Timing is not the most important thing, it is the only thing.’ This implies that timing an entry point as well as exit point is by far the most important thing for an investor to do well. ‘Timing is the only thing‘ means that it is more important than reading news, analyzing fundamentals, following gurus, and so on. Excellent charting skills are a prerequisite to apply this principle!
What we need is a solid method to understand the high level direction of markets, for the medium and long term.
Is There A Way To Predict A Stock Market Crash
Where to find a way to predict the next stock market crash?
The answer is “at InvestingHaven”, because that’s what we do for so many years. Every day again we look at our forecasts and continuously improve our forecasting ability. We take each and every mistake into account, and use them to bring our method to a higher level.
Today, we are on record with a forecast about the next crash based solely on 5 leading indicators on 5 distinct charts. And we did not spend more than one hour to get to this conclusion. No fundamental research, no economic data points, not any article (think of articles that most investors tend to attach a high value on like these ones here, here, here and here) was used to get to this conclusion.
We want our followers to keep us honest, so please follow up on this and challenge us on this in the next few years.
5 Leading Indicator Of A Stock Market Crash
A crucial insight is where to look for to get leading indicator information. Stated differently which are the leading indicators?
This is what we define in our investing method:
All major moves in markets, especially market crashes, start with major turning points in credit and currency markets. Hence, 10 and 20 year rates, as well as leading currency pairs, have the most influence on all other markets, including stock markets around the globe.
Based on this what we really need (only need) is a few currency, credit and stock market indicators.
We have 5, and only 5, leading indicators for a stock market crash:
- 20 year Yields, and their long term chart pattern(s).
- 20 year Bonds, and its long term chart pattern(s).
- 7-10 year Bonds, and its long term chart pattern(s).
- The Euro, and its long term chart pattern(s).
- The Russell2000 index, and its long term chart pattern(s).
So, let’s review them one by one, only to conclude that the next stock market crash is due for late 2021 / early 2022.
Credit markets: 20 year Yields
In the last 2 decades 20 year Yields started crashing near their chart pattern tops. Every time this resulted in a 30 to 40% decline in a short period of time (think 3 to 9 months) it affected stock markets significantly.
Right now after a rise of 30% followed by a decline of 40% we don’t see 20 year Yields on a point in this chart pattern that is concerning. This obviously will change over time.
This leading indicator does not suggest a clear timing to forecast the next stock market crash.
Credit market leading indicator: 20 year Bonds
On the other hand the chart pattern of 20 year Bonds seems much more helpful.
What we particularly are interested in is the rises from the bottom of the pattern to the top. That’s when markets go from ‘risk on’ to ‘risk off’.
At the end of 2018 this market bottomed after a 4 year consolidation (pretty unusual).
Although not perfect this indicator suggests it will take a few years until we it moves to the top of this pattern.
Credit market leading Indicator: 7-10 year Bonds
Our next leading indicator has essentially very similar conclusions as the previous one.
We tend to look at both the 20 year as well as the 7-10 year Bonds for confirmation.
The annotations on this chart say it all. And it looks like a breakout on this chart will push this indicator to the top of the channel in a few years, between 2 and 4 years most likely.
Currency leading Indicator: the Euro
The Euro is helpful in understanding that there is no stock market crash coming in the near future.
In essence this is a similar conclusion as the one from the 20 year Yields chart.
Stock market leading indicator: the Russell 2000 index
Last but not least, the Russell 2000 which we consider the leading risk indicator for U.S. markets. Arguably, it does this also for global stock markets.
As per our methodology markets go through ‘risk on’ and ‘risk off’ cycles in an alternating way.
That’s what we see reflected on the chart below. The Russell 2000 does the best job of all indexes reflecting this.
If our observation is correct that we are about to start a new ‘risk on’ cycle it means two things:
- The next ‘risk off’ is some 18 to 24 months away.
- The next ‘risk off’ will be an aggressive one.
The Russell 2000 looks helpful in forecasting the timing and how brutal the next stock market crash may be. Combined with evidence from the 4 other leading indicators we conclude that we will likely see a very brutal crash in (global) stock markets in 2022.
[Ed. note: As of this week we will provide in-depth analysis to our ‘free newsletter’ subscribers. We will bring premium content with specific investing tips on a weekly basis, mid-week, free of charge. We will do this for 4 months. Subscribe to our free newsletter and get premium investing insights in 2019 for free.]
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