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.