RealMoney Silver - The Crash Is Coming!

The Crash Is Coming!
By Jonathan Moreland
RealMoney.com Contributor
7/18/2007 2:07 PM EDT

I am absolutely certain the market will crash. There, I said it.

I'm not just writing to rehash the litany of reasons why it could happen. The esteemed Wall Street Journal did that (again) earlier this week. I'm not even going to opine why it should have already happened if everyone were as smart as me, as The Economist seems to do that in every other issue.

Nope, I'm just going to state unequivocally that the crash will happen.

I'm just not going to tell you when.

But when it comes, I certainly hope you will remember my genius.

Coulda, Shoulda, but Usually Doesn't

Given the number of times over the past years that stocks have shrugged off real economic, geopolitical and fill-in-the-blank concerns to deliver great returns, why are so many "The Sky (Just Might) Be Falling" pieces littering the financial press every day? And who is hanging around the bear camp instead of researching promising stocks in which to invest?

The answer to the first question is that financial journalists are primarily writing these columns, not people in the trenches paid by clients for performance. But you can't really blame them. After all, the risk/reward payoff for this bearish work is clearly bullish.

The authors can lay claim to genius if the market does happen to crash shortly after their piece is aired, and they catch no derision when the market casually tacks on another 10% in the wake of their hand-wringing. They can't be active traders because of their employers' policies, so they're not losing money by acting on their own opinions. And if the crash doesn't happen this month, there will be another problem to unveil next month. Oh, the joy of being paid by the investment word instead of one's investment income!

So, to the many macroeconomic imbalances and oddities, the bears can now add the wholesale mispricing of the CDO market. Those warning of an imminent market crash for years can now ominously point out that this very real problem could (though many are really saying "should") finally be the straw that breaks the bulls' backs -- just as they told you some other factor could/should do so about 30% ago.

Who knows? Maybe this time the sky-is-falling crowd is finally right, and all the investors who moved their money to cash based on their insights before the last 30% of gains will now be able to sneak back into the market with indices only 10% above where they bailed.

More likely, however, is that framing the latest objection to being long will only freeze otherwise rational investors into Hamlet-like inaction that ultimately costs them the opportunity to make good money.

Snap Out Of It

So if you're soaking up the latest bearish tirade, slap yourself and get back to work. Plunges of 20% to 25% are rare and, in any case, usually preceded by more obvious technical warning signs than the indices lurching by a percent or two over a week's time, as has been the case lately.

The Feb. 27 swoon was such a sign -- and didn't it bring out the back-patting columns from permabears. Being a "buy-and-trade" type of investor, I raised some cash then (and will accept the derision of any true long-term investors reading this column as long as they are judged publicly on a quarterly basis). But I got right back in when strong trading just a few weeks later clearly refuted the imminence of a crash.

Similarly, I viewed last week's excellent price action amid the CDO concerns as another signal to put bearish thoughts on the back burner. So, despite concerns and a bit of turmoil, I've been mostly invested all year and am fully invested as of this writing.

What are insiders saying now? I've been lamenting that aggregate top-down insider statistics have been less helpful than normal in signaling the direction of the indices' next big move. While the rolling four-week average of my weekly buy/sell ratios has been sitting at a point where it has inflected downward in conjunction with rallies this year (see the yellow oval on the chart below), larger rallies over the past several years have usually begun after this metric has inflected downward at a much less bearish absolute level.

Click here for larger image.

Source: InsiderInsights.com

I had already discounted the "sell signal" I interpreted from insiders in January (as indicated by the right-most vertical red bar on the chart) shortly after I posted it. So, in hindsight, all the top-down insider stuff has just been noise for months now.

Fortunately, market technicals have been bullish enough to make insiders' collective shoulder-shrugging less important to my own investment decisions. And the good number of quality insider-buying signals on the individual stock level has made staying long easy.

To be clear, I don't advocate complacency about the numerous macroeconomic imbalances and/or mispricing in financial markets when making your investment decisions. But keep such concerns tactical. Worried about debt markets? Then stay away from companies with exposure to them.

But wallowing in the mass of anxiety-generating bearish comments is unhelpful. The writers are not wrong in pointing out real concerns, but they don't relay them with adequate perspective. Why is it, for instance, that so many real economic problems for the world and the U.S. have been ingested by the market without a crash? Is everyone really just stupidly complacent as we head into the abyss?

Could be. Meanwhile, we billions of feeble humans continue to make those little daily self-serving and self-actualizing decisions that accumulate to make the world's economy continue to grind forward. I've come to view these behaviors as acting like an inexorable economic gyroscope working to correct global imbalances, which makes going to Oct. 19, 1987 in a handbasket more difficult than bearish financial articles would have you believe.

Of course, that sad day did occur, illustrating that crashes are certainly possible. But even that event was foreshadowed by some technical signs that I'm betting will flash a warning again. It's better to lose some money when a warning sign like that definitely does occur than to give up making money (and sleep) worrying that such a swoon may occur.