If It Looks Like A Crash And Acts Like A Crash, It’s A Crash

The playwright Ibsen coined a phrase that morphed into “a picture paints a thousand words.” So here is a thousand words in one picture:

I am so tempted to end the article right there.

The key question with charting is where does foresight end and hindsight cut in? Theory would say you can never look at a chart and ascertain the future. People who follow moving averages have the same problem. It looks like it’s predictive but the more you dig the less clear it is that you can make money using moving averages as signals. Sophisticated hedge funds use signals that are too small to make money from and roll them together to give themselves combinations that get them to a profit worth winning, but the trouble with charts is that random can make patterns but their likelihood to continue is a nil profit making 50/50.

Or so the theory goes.

However, you really have to cling to efficient market hypothesis in a way few people do to look at the above chart and not see a crash ahead, rather than a future of smooth and gently random sailing. I personally believe in the efficient market hypothesis, but it’s the rule not the law, and the crazier the set up the harder it is for the market to keep to that rule. The kurtosis in markets is way too fat. Translation, “‘the tick’ hits the fan” way too often for statistical theory, and freak accidents happen way too often for what a perfect market distribution of outcomes would create. This is because the topology of the market is not two-dimensionally flat, or to translate, there are all sorts of nooks and crannies in the market that can collect issues than at some point escape into the market landscape and mess it up. The fat finger of a flash crash is just one such example. A central bank bailing out an economy under pandemic is another.

Classically a crash is 25%, but technology has more beta so can easily go 30%-50% and the big ones like 1929 and 2000 go more than 75%.

So at very least the call is, is it going to crash? Then how far?

In this post-free market world, the answer is how low will it be allowed to fall before on goes the new money hose to keep it from systemic collapse.

I think that is just below that 25% mark—call it 12,000—but if I just look at it and wonder it is somewhere between 8,000 and 10,000. A drop of the Nasdaq by half would be a huge blow.

That would likely kill inflation stone dead, but then so did the Great Depression.

Henrik Ibsen’s original quote was, “A thousand words leave not the same deep impression as does a single deed.”

For me that deed is to buy lots of precious metals, all the while keeping away from the darlings of the main market.