Four Signs Global Stock Markets Could Be Ready to Fall

NEW YORK (The Street) - It's impossible to predict a stock market crash, but not impossible to look at technical charts of prior crashes to show the downside risks if a crash were to occur in the current market environment.

Market strategists cannot predict the timing of a stock market crash because crashes follow euphoric parabolic rises as pre-crash bubbles inflate. It takes a "black swan" event to cause most investors to flock to the exit simultaneously. This is how crashes begin.

The charts below show prior global market crashes. Keep in mind these are recurrent events that loom around the world today. The questions are how high the markets can trade before they crash as parabolic bubbles inflate, or re-inflate.

First, here are four potential triggers -- present in the markets today -- for a stock market "black swan" event.

Large Stock Buyback Programs

Huge share buyback programs where companies issue debt and use the funds to buy shares from the public market are one potential black swan trigger.

Buybacks reduce the number of shares in the public market which boosts equity valuations. With yields on U.S. Treasury notes and bonds on the rise, this source of stock market support could fade abruptly. If the economy unexpectedly slumps into recession, companies would have reduced revenue, but still be saddled with the debt servicing costs.

Hot IPO Market

A heavy calendar of IPOs is another stock market concern. Before the Crash of October 1987, initial public offerings surged to 500 year to date totaling annual record $22.5 billion before the year ended. Most of these IPOs had price-to-earnings ratios in the high 20's, low 30's. The Dot.com Bubble popped in March 2000 in a year of 406 IPOs. In 2014 the number of IPOs was 273 totaling a raise of $85 billion including the $22 billion raised in the Alibaba (BABA) in September. The Nasdaq Composite declined by 10.7% between Sept. 19 and Oct. 15 following this IPO.

Heavy Margin Debt

NYSE margin debt was at an all-time high in April 2015, and as the chart below shows, peaks in margin debt line up with peaks in the S&P 500 in March 2000 as the Dot.com bubble was popping, and in July 2007 three months before the beginning the Crash of 2008. Note that at the markets bottom in March 2009 margin debt also bottomed.

Surging M&A Activity

M&A activity has been strong so far in 2015. Prior peaks in merger and acquisitions occurred at the peak of the Dot.com bubble and at the peak of the debt boom that began the 2008 financial crisis.

We know that risk factors are present today, and that the Dow Transportation Average is in correction mode down 10.2% from its all-time intraday high set on Nov. 28.

Here's the monthly chart for the Dow Jones Industrial Average going back to the 1980's.


Courtesy of MetaStock Xenith

This monthly chart for the Dow 30 shows that the Crash of 1987 is barely visible. Note that the uptrend connecting the lows of the 1980's shows downside risk back to the March 2009 low of 6,470.

Here's the weekly chart for Dow Industrials since 2005.


Courtesy of MetaStock Xenith

The weekly chart for the Dow 30 shows that this benchmark average peaked at 14,125 in Oct. 2007. The Crash of 2008 totaled a decline of 54% to the low of 6,470 in March 2009. The huge parabolic rally since this low reached a high of 18,351 set on May 19, up 184% so far. The downside risk is that the index could fall 23% from the May 19 high to the 2007 high of 14,125, or 65% to the March 2009 low of 6,470. This is the risk if this parabolic bubble crashes.

Let's look how bubbles can re-inflate by looking at the weekly chart for the Nasdaq Composite.


Courtesy of MetaStock Xenith

The weekly chart for the Nasdaq clearly shows that the Dot.com bubble began to inflate in 1996, and the all-time intraday high of 5,132 set in March 2000. The post-bubble low was set in Oct. 2002 and the rally to its Nov. 2007 high was just above the 38.2% Fibonacci Retracement of this crash.

The March 2009 low was above the Oct. 2002 low, setting the stage for a rebound to at least that 38.2% retracement. The momentum of the Fed-induced re-inflation of the bubble accelerated as the Fibonacci Retracements were quickly violated to the upside to a multiyear intraday high of 5,119 set on April 27 just shy of the March 2000 all-time high.

If this re-inflated bubble pops, the downside risks of this crash are 44% to the Nov. 2007 high of 2,861 and 75% to the March 2009 low of 1,266. The total rally from the March 2009 low totaled 304%.

Let's look how bubbles can re-inflate by looking at the monthly chart for the Nikkei 225.


Courtesy of MetaStock Xenith

The monthly chart for the Nikkei 225 shows that the rebound from its March 2009 totals 195%, but that's just above the 38.2% Fibonacci Retracement of the decline from the all-time high set in Dec. 1989. If this new bubble pops,  the risk to the 2007 high is 41% and is 66% to the 2009 low.

Let's look how bubbles can re-inflate by looking at the monthly chart for the Shanghai SE Composite.


Courtesy of MetaStock Xenith

The monthly chart for the Shanghai Composite shows a crash of 73% from its all-time high set in Oct. 2007 high to its Oct. 2008 low. The current re-inflating bubble is above its 61.8% Fibonacci Retracement. If this new bubble pops, the risk to the 2008 low is 68%.

For reference, here is a table of all the indexes with the highs and lows since before the crash.


 

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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