What Would a Stock Market Crash Look Like in 2018?
The stock market is getting very volatile in the last few weeks.
Traders are starting to feel like another stock market crash might be coming this year. I think that a stock market crash will only happen when there is an ignition source.
There is enough dynamite around from the reckless quantitative easing (free money that was printed) starting in 2009.
But dynamite by itself is not dangerous, until there is an ignition.
While we think that there is a large probability for a 20% drop in the stock market this year, we do not know the timing of such an event. In fact, no one does. It’s anyone’s best guess.
But what would a stock market crash look like in 2018?
Let’s pull up the past stock market crashes and create a projection of our own.
Stock Market Crash – 2009 Housing Bubble
In 2009 the stock market crash happened because banks were providing mortgages to unsuitable buyers.
The financial industry took it a step further and “securitized mortgages”. Mortgage-backed securities (MBS) were a package of good credit worthy loans mixed with a lot of highly speculative loans.
Big banks then got rating agencies to rate these securities as “safe” for investors. Banks sold them to investors as high yielding investments.
The reality was that no one really understood what was contained in them, because they were very complex.
When the borrowers started to default it brought down the entire financial market to it’s knees.
By the time it was all said and done, the SP500 dropped over 57% in 73 weeks (518 days).
The weekly chart below is a visualization of the severity of the drop.
Now let’s go even further back to the previous stock market crash, before the notorious housing bubble bust.
Stock Market Crash – 2001 Technology Bubble Crash (Dot Com Bubble)
The stock market was on an unstoppable run between 1995, leading up to the 2001 technology stock market crash.
Technology companies were severely over valued, and investors continued to buy at record high valuations recklessly.
All you had to do was purchase a domain name and call yourself a technology company and your stock value exploded instantly.
But like all great parties, this one also had to come to an end.
When the dot com stock market crash was all over, the SP500 dropped 48% from the highs in 110 weeks (777 days).
Looking at the weekly chart below, you can envision the carnage and steep losses retail and institutional investors experienced.
But what would a stock market crash look like in 2018?
Stock Market Crash – 2018 Central Banking Bubble?
The truth is that central banks have not exited their large positions they took in 2009 to “save the markets”. Balance sheets are loaded with toxic securities that were absorbed in the housing bubble stock market crash.
In the US, the Federal Reserve owns over $4 trillion USD worth of mortgages and treasuries. They will have to sell them at some point, and when all that supply comes on the market who will buy it at the market top?
While the Fed has started to unload their position, they have only reduced the total holdings by a tiny, insignificant fraction. The big unload is still coming.
When it does, will the stock market be able to support it?
Using the history of the past two stock market crashes we can visualize what a drop would look like in 2018.
If the stock market crash happened from the previous swing high of 2872 on January 26th of 2018 – this is what it would look like on a weekly chart.
Equities would drop steeply from here, down to a low of 2,070 on the SP500 – that’s at least a 30% drop.
Some would argue that the next stock market crash will be the biggest on record, which could push prices down to 1,500 or lower!
But what’s the likelihood of that happening in 2018?
2018 Stock Market Crash – Conclusion
Looking back through history, a stock market has occurred approximately every 7.5 years.
There is a great book on the topic called “Cycles – The Science of Prediction” that I strongly recommend you read to understand overall economic cycles.
Every market crash has held to the 7.5 year rule – do the math for yourself:
- 1987 – Black Monday crash
- 1994 – soft landing
- 2001 – dot com stock market carsh
- 2008 – housing bubble stock market crash
- 2015 – was a 15% soft landing
- 2018 – will it be a delayed stock market crash?
- 2021 – or will we delay the drop until 2021 for a massive stock market crash?
At the end of the day you need to realize that no one has the answer to this question.
The best part is that if you follow the right information you can be prepared when the stock market crash finally happens.
When there are massive institutions holding a highly concentrated stock market position in a few big companies, we are primed for a big crash.
Every professional trader knows that big positions are very easy to accumulate and near impossible to offload quickly.
Join a group of professional traders and let us help guide your journey through the financial markets.
When the next stock market crash does occur, you can make more money on the way down in a much quicker time than you can in a bull market.
Will you be prepared?
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The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.