Im getting a few folks asking me what to do now the market has crashed. I don’t blame them. the signals and the situation itself is wildly unusual.
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 is -25%, -33% can happen frequently, then -50% and -75%. Each level is rarer. For example -75%+ is only 1929 and 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 is just opinion and not only can I be wrong but circumstances can change significantly. We all need a simple guides to the way Crashes unfold.
The ’’now’ is about navigating what comes next. So here are the basics to how a crash pans out.
Here is a picture crafted by my own hand and MSpaint.
This is only extremely obvious when you are not trying to catch a falling knife and somehow trade your way out of horrible losses. If you study previous crashes you will start to see, how things work out. Don’t think recover is inevitable, or will happen quickly, it took to 1957 for the 1929 crash to recover its previous level, for instance. The way to consider the future is to not what the bottom looked like, when it happened and where is the safest part of the cycle to reenter.
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 first 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 just the next simplest form of recovery after the 2 step fall and recovery. W is the next possible pattern beyond a V shape, its just a crash and recovery with an extra step.
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 classical danger of ‘catching a falling knife.’
You have likely read my articles warning of this crash, so now for me its about re-entering at the right time and place. That’s as tough as getting out near the top. Pundits like to say its not possible, and perhaps my luck in doing so over the years here on Forbes is just a happy fluke.
My observations are though:
V shaped recoveries are very rare and only come because the fall is technical or a malfunction or both. Recovery, especially if its more than a glitch still takes time.
Beware the dead cat bounce.
The W bottom from a crash is very common. Better to re-enter too late than too early because crashes take time to unfurl and repair.
The bottom comes when people are weeping not when they are in the early stages of grief (anger, denial, bargaining) it comes on intervention and/or the point of investor depression.
Im not fan of the 3D chess players and will 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 I’m right or wrong.
So here is a map:
You know I like to keep it annoyingly simple. The Tarriff dynamic should be priced in now. You can see this setback puts us back on a trend from 2016-2017 which is sustainable under the right circumstances. Without anymore madness the market should trend normally from here, volatility should cool, then a new trend, whatever it may be, should set off.
However….
More madness and down we go.
I won’t trade hope. Ill be buying the last leg of the W.