Markets made it through the graveyard month of the year intact. Now we come to October, the home of the market crash. This is not a prediction but over the years I’ve seen many individuals talk about the possibility of the market crashing, says Jeff Greenblatt Wednesday.
A stock market crash is such a low probability event it's even bad for business to think about it.
Why? Simply put, those calling for the market to crash are going to be wrong 99.9% of the time. That’s because the market only crashes this time of year. By that standard, you can automatically rule out ten months of the year. I can only think of four instances in all the years I’ve been alive where the market has had "waterfall events" and one of them happened when I wasn’t even here.
Of course, I’m talking about 1929 and you’ll just have to take my word for it I wasn’t around back then. But I was around in 1987. The other two notorious stock market events were 2001 and 2008. Markets did crash after the Lehman bankruptcy in 2008 and the action after markets reopened in 2001 was very rough as well.
Now that I have your attention, you should see this chart of the Russell 2000 (RUT). Everyone is focused on the Dow (DJI) hitting new highs. Fair enough. The rest of the market isn’t doing that badly either. Transports (DJT) flirted with breaking down but holding key polarity.
Tech is hanging on. The HGX housing arena looks terrible, setting yet another new low since it peaked in January. Do you realize it’s down 253 calendar days already? By Wall Street standards, it’s down 23% off the high so they’d call it a bear market. In my work when a pattern is down over eight months, I’d call it a major league correction. It is likely a manifestation of higher interest rates.
Did you see the bond market on Wednesday? The long bond had its biggest red bar in months. From Tuesday’s close, it was down at its lowest point 1.7% which may not seem like much compared to stocks, but for the bond market this a giant leap for mankind in the direction of a bear-fueled higher rate environment. Throw in higher fuel prices and it might not be too long before consumers start to feel the pinch.
I digress, let’s talk about the Russell. The top came in on a great vibration at 141 days with a square root at 41.738 and a price of 1742.
When price, time and the square root line up in this fashion, we should get the kind of reaction we are getting. I put an Andrews pitchfork and the trend line on it so you can see where we are. Additionally, the pattern is now at 161 days off the bottom.
Most seasoned traders realize in a strong bull, the small caps lead to the upside. There is a reason for that. Small caps represent the next wave of technology that should lead a healthy economy into the next prosperous bull cycle.
What happens when the small caps are leading to the downside? Does it mean there is no new technology coming down the chute? In the very least, if a healthy market means small caps leading to the upside, is the polar opposite also true? We don’t want to see small caps leading lower, that much I can tell you.
Right now, it is on the cusp of the pattern’s first real technical damage. It has not broken down yet but Wednesday’s candle formation is not encouraging.
If they break here, not only do they violate an important 161-day cycle point, but they break an important pitchfork and trend line as well. They’ve already violated what some traders look at which is the 50-day moving average.
No matter how good the Dow has looked lately, with the interest rate situation where it is and if small caps continue to lead to the downside it can’t be good. Some traders may wake up and we may finally wake up to a day where the Dow opens down 400 points on interest rate fears.
We don’t need the market to crash to shake the complacency out of the market. But if what you see here does activate it usually doesn’t have a happy ending.
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