A crash is generally accepted to be a drop of 25%. We have had that on the Nasdaq.
There are further levels to crashes, and crudely, if you look at the Nasdaq now, they would be 15,000, 10,000, and 5,000.
Another way to look at it: -25% and -33% can happen frequently, then -50% and -75% are progressively rarer.
For example, -75%+ only happened in 1929 and during the Dotcom crash.
It takes a fair bit of disaster to get past -25%, but to be clear, I feel we are in for a lot more.
However, that’s just my opinion – and not only can I be wrong, but circumstances can change significantly.
We all need a simple guide to how crashes unfold. The “now” is about navigating what comes next. So here are the basics of how a crash pans out.
Here’s a picture crafted by my own hand and MS Paint:
This is only extremely obvious when you’re not trying to catch a falling knife and somehow trade your way out of horrible losses.
If you study previous crashes, you’ll start to see how things tend to play out. Don’t assume recovery is inevitable or will happen quickly.
For example, it took until 1957 for the 1929 crash to recover its previous level.
The way to think about the future is to understand what the bottom looked like, when it happened, and where the safest part of the cycle is to re-enter.
The V-shaped bottom is very rare. This crash is unlikely to have one.
You don’t want to try and catch the first inevitable bounce at the base of the initial fall, because that fabled dip might just be a pause – especially if there appears to be a good reason for the initial drop.
Most likely, the bottom will be a W, and you can check previous crashes to judge for yourself.
A W is simply the next most common form of recovery after the two-step fall and rebound. It’s just a crash and recovery with an extra step – more plausible than a clean V.
The following piece of naïve graphic design has served me well for a couple of decades:
By buying the last leg of the W, you avoid buying into a fall that’s only halfway down – the classic danger of “catching a falling knife.”
You’ve likely read my articles warning of this crash, so now for me it’s about re-entering at the right time and place. That’s as tough as getting out near the top. Pundits like to say it’s not possible, and maybe my luck in doing so over the years here on Forbes is just a happy fluke.
My observations are:
- V-shaped recoveries are very rare and only happen when the fall is technical, a malfunction, or both. Even then, recovery – especially if it’s more than a glitch – still takes time.
- Beware the dead cat bounce.
- The W-bottom is very common. It’s better to re-enter too late than too early because crashes take time to unfold and repair.
- The bottom comes when people are weeping, not when they’re in the early stages of grief (anger, denial, bargaining). It comes on intervention and/or at the point of investor depression.
I’m not fan of the 3D chess players and prefer to let the hive mind of the markets judge reality for me and communicate the true situation. As such, I’ll watch for the next leg down and let the market tell me if I’m right or wrong.
So here is a map:
You know I like to keep it annoyingly simple. The tariff dynamic should be priced in by now. You can see this setback puts us back on a trend from 2016-2017, which is sustainable under the right circumstances. Without any more madness, the market should trend normally from here. Volatility should cool, and then a new trend – whatever it may be – should begin.
However…
More madness, and down we go.
We won’t trade hope. We’ll be buying the last leg of the W.
