Many innocent investors got burned during the Corona crash, financially and mentally because they sold at the depth of the stock market crash lows. Combine this with the relatively recent traces of the epic crash of 2009, aka the Great Financial Crisis, and you get a pretty explosive mental and emotional ‘cocktail’ that is deeply rooted in the psyche of investors. Many investors got so scared that they see a stock market crash in any market pullback since then. This is understandable, but not sustainable. We use a limited set of leading indicators to forecast a stock market crash, our mantra is ‘less is more’. Based on our current market readings we believe there will NOT be a stock market crash in 2022. We do believe though that a stock market crash will start in the last quarter of 2023 and will run into 2024.
Before we look at a few charts that suggest there will not be a stock market crash in 2022 we want to point out that Forbes was right when they wrote this:
While there was (and still continues to be) a very real economic, financial and health crisis globally, market fluctuations aren’t based solely on economic factors. The economy is a major factor, but panic plays just as equal a role in stock market volatility.
A stock market crash is mostly an emotional event. Most stock market crashes are exaggerated. They do not reflect reality nor fair valuations especially not at the depth of the stock market crash.
Still, it is key to be largely in cash whenever a stock market crash happens. So accurate marketing readings and crash readings are crucial for investors.
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 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!
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?
Yes, there is. You require two things to be in place:
- Crash indicators, both short and long term.
- Leading market indicators, long term.
In the next 2 sections we will cover both separately.
Note that you don’t have to spend countless hours on research to do a stock market crash forecast. You need a few solid and reliable indicators. 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.
Moreover, it is key to continue to track these indicators because markets can do any thing they want, at any time. While a stock market crash was not in the cards in 2020 it did happen because of unforeseen circumstances due to the pandemic.
What do our crash indicators forecast?
At InvestingHaven, we worked out a set of indicators that are able to forecast a stock market crash. This set of 5 indicators has some well known and some less known indicators.
One of our crash indicators is the USD. Below is the weekly chart. If anything, at the time of writing (right before 2022 kicks off) we see a really bullish setup. Not great for markets.
What we do know from history is that a rise of 20 to 25 pct in the USD is going to create really big damage in markets. For the USD to rise 25 pct it has to go to 112 points approx. While this can happen we don’t think it is going to get that extreme. The line in the sand will be 100-104 points to invalidate our forecast, a breakout above that range might induce market selling in a way that it will result in a stock market crash.
Among all our crash indicators the USD is the one with the most concerning setup. The other crash indicators do not forecast a stock market crash in 2022.
4 Leading Indicators 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 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.
Moreover, leading stock market indexes should be considered leading indicators as well.
We use these 4 leading indicators to predict a stock market crash:
- 10 year Yields, and their long term chart pattern(s).
- The Euro, and its long term chart pattern(s).
- The Dow Jones index, and its long term chart pattern(s).
- The Russell 2000 index, and its long term chart pattern(s).
Stock market leading indicator: 10 year Yields
Bond yields go up with risk sentiment in markets.
When the Corona crash started 10 year yields fell through multi-decade support.
This leading indicator (TNX) says that 1.3 – 1.5 must hold. If so there will not be a stock market crash in 2022.
Currency leading Indicator: the Euro
The Euro is helpful in understanding that there is no stock market crash coming in the near future.
While any stock market crash, large or small, since 2009 started when the Euro hit the falling trendline we now see the opposite going into 2022. The point is this: the downside potential in the Euro is limited compared to previous instances marked with a red arrow in the past.
Stock market leading indicator: The 100 Years Dow Jones chart
From our article Dow Jones Historical Chart On 100 Years *5 Must See Charts*:
It is hard to see but the Dow Jones broke through its 100 year rising channel. A break above a 100 year trendline is a big thing, a really big thing.
Chart update: November 2021
When we zoom in a bit we can see this setup on the monthly chart (Dow Jones 20 years):
Chart update: November 2021
The close-up of the 100 year Dow Jones chart on the weekly timeframe give us the insight we need: this is a secular breakout, and it is confirmed. The 100 year rising trendline was broken to the upside back in March/April of 2021, and it was successfully ‘tested’ again in September/October of 2021.
Chart update: November 2021
The daily chart of the Dow Jones, the same chart as the other 100 year Dow Jones charts shown above, shows the ‘hesitation’ and ‘consolidation’ right above the 100 year channel.
Conclusion? Very simple, we have a disruptive change in stock markets, presumably driven by accelerated inflation. This suggests markets will move higher before they come down.
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.
The Russell 2000 is breaking out above its 2021 resistance. This means that bullish momentum is building up, and this won’t happen right before a stock market crash is what we are thinking. By exclusion we say that a stock market crash is not about to start in 2022, there is too much bullish power in these markets as 2022 kicks off.
3 year stock market cycle
So, if 2022 will not bring a stock market crash, then when can we realistically expect one?
Our answer: in the last quarter of 2023 is when it might start.
Very simple, the 3 year stock market cycle.
Readers can go back in time to find this 3 year stock market cycle. The shortest possible version is that the real breakout in stock markets started in October/ November of 2020. So, we add a bullish cycle of 3 years to this and we obtain October/ November of 2023 as the end of this bull run.
We expect a violent stock market crash in 2024 which will bring stocks back to either of the following two levels:
- Either back to levels of November of 2020;
- Or to levels of April of 2021.
As we get closer to 2023 we will update readers about this stock market crash forecast.
The next stock market crash? Not in 2022, but we predict the next crash to start around year end 2023-2024. It will bring stocks back to 2021 levels. #stocks #markets Click To Tweet
In the meantime premium members will be the ones that will get the most up to date information, both in terms of medium term stock market pullbacks but also long term stock market crashes. You want to follow our short term trading algorithm which now comes in full auto-trading (so you can create passive income) and/or you follow our stock market investing work in Momentum Investing.
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