Concerns About a Stock Market Crash Looming on Monday

Concerns About a Stock Market Crash Looming on Monday

There are growing concerns about a potential stock market crash on the horizon for Monday. Worries and uncertainties are mounting, casting a shadow over investors’ confidence and prompting a cautious approach to the week ahead. It’s a situation that calls for careful monitoring and preparedness for potential market turbulence.

There’s no way to avoid it any longer. The widespread and serious issues have reached a critical point. The only solution is a significant reset of investor beliefs, reasoning, and expectations.

Crucially, this reset isn’t related to the typical overoptimistic trends driven by easy money and fads. Instead, it involves a return to traditional capital market operations that had been distorted by the Federal Reserve since 2008, spanning a 15-year period! Never before has there been such an extended period of extensive anti-capital market interventions.

It’s important to note that the phrase “had been skewed” is accurate because the bond and money markets have now regained their role in setting interest rates. This is a crucial step because allowing market-driven supply and demand to determine the price of capital is at the core of a robust and successful capitalist system.

The Federal Reserve’s two main actions were keeping interest rates near 0%, which resulted in significant disparities, and creating trillions of dollars in money supply, leading to high inflation – a pattern consistent with historical precedent. What may be even more concerning is the harm inflicted on investors and others due to these 15 years of improper Federal Reserve actions and the dissemination of misleading, and at times, false explanations.

Now, it’s time for new educational courses. They will be challenging and might initially appear to be incorrect. In fact, some media outlets are already trying to rationalize the existing negatives and even put a positive spin on them by assuming a return to the past conditions driven by the Federal Reserve. However, that’s unlikely to occur. When trends reverse, they fade away because successful investing always shifts its focus from the exhausted past trend to the new, future-oriented one.

Why is a crash necessary?
The recent two-plus month decline in the market hasn’t been enough. The extensive list of negative factors and the prevailing investor sentiment demand a significant disruption to create the necessary shock. This means a frightening plunge is needed.

How much could the stock market decline?
It’s impossible to predict at this moment. There are too many uncertainties about the composition of investors’ portfolios, both individual and institutional. We do know that options, margin accounts, and other forms of leverage have been widely used. Investors employing these strategies will be the most vulnerable, as a complete loss doesn’t require a 100% price drop.

Furthermore, the hedge fund industry wields substantial investing power. These funds’ capacity and willingness to take significant long and short positions elevate the risk. It’s essential to remember the adage, “It’s easier to scare an investor than to reassure one.” In other words, a selloff fueled by short-selling can significantly impact investors’ desire to sell and exit the market.

Additionally, the stock market faces vulnerability to swift price drops. Unlike the presence of specialists who can help stabilize a stock’s movement, “circuit breakers” (temporary trading halts) activate when price swings reach a certain percentage level, whether upward or downward. However, trading resumes after these brief pauses, allowing the same participants (both long and short) to continue their actions. An extreme illustration of these circuit breakers and trading pauses is seen in the one-day activity of GameStop on January 28, 2021.

In essence, investor emotions are on the verge of taking the lead. When understanding falters, rational thinking gives way to emotional responses.

Concerns About a Stock Market Crash Looming on Monday
(GameStop 1-day trading – Orange circles are circuit breaker pausesJOHN TOBEY (STOCKCHARTS.COM))

As a result, anticipate that investors (as well as the media) will soon transition into a realm of uncertainty where confusion prevails. As the stock market continues to decline, the realization that something is amiss for some inexplicable reason may set in, and the fear of further deterioration grows. Eventually, a mass exodus occurs when many investors opt to exit, driven either by their inability to endure the turbulence or by the anticipation of an impending catastrophic event – a climactic stock market plunge or an economic recession.

The best approach to shield oneself from these missteps is to maintain substantial cash reserves. This financial cushion not only mitigates the impact of underperformance but also generates a keen interest in buying when the selling fervor intensifies.






( Source: Forbs )