Setting The Scene For The Stock Market Crash

September 11, 2015 by

market correction bearShah Gilani:  Make no mistake about it: A stock market crash happened last Monday.

And it was terrifying.

It was frightening.

Stocks bounced on Wednesday and Thursday, with the Dow Jones Industrial Average (INDEXDJX:.DJI) gaining back more than 1,000 points.

Now investors want to know: Was last Monday’s doubling over a below-the-belt hit?

Was Tuesday’s cheap shot just a phantom blow?

Was the rally back Wednesday and Thursday an “all clear” signal?

Was Friday’s action indicative of anything?

Here’s the truth about last week, what’s going to happen next, and what you should do…

Setting the Scene for the Stock Market Crash

stock market crash

Let’s look at the market conditions heading into last week.

Stocks had been weak. It had been hard to tell from the sideways action exhibited by the major averages, but beneath the headline numbers, more than half of all stocks were trading below their 50-day moving averages.

Indeed, even before Monday’s tumble, a lot of stocks had dipped below their 200-day moving averages.

While being above a 50-day moving average (the average price a stock has been trading over the past 50 days) is a positive sign – and falling below a 50-day average is a warning sign – share prices breaking below their 200-day moving average is a flashing red light.

Red lights are now everywhere.

There had been profit-taking toward the end of the previous week. That tipped the balance between investors thinking we would break higher from the sideways trend and investors who saw lackluster action as a reason to take profits off the table.

With bulls and bears facing off in this sideways market, the backstory had become China.

Economic growth in China has been slowing, and Chinese stocks had been getting killed. When U.S. investors woke up last Monday morning and saw the Shanghai Composite Index down 8.5%, they panicked.

Speculators, sensing the market’s weakness going into the previous weekend and seeing Chinese stocks collapsing before U.S. markets opened last Monday, shorted Standard & Poor’s 500 Index futures at a furious pace. Institutional money managers didn’t hesitate to jump on the bandwagon. Before markets opened, the futures rout indicated that the bellwether Dow Jones would open more than 1,000 points down.

And that’s what happened. At the open, the Dow dropped more than a 1,000 points for the first time in history. But what really happened was worse.

Much worse.

Last Monday’s market plunge started out as a story about China, but ended up being about the mispricing of exchange-traded funds (ETFs) and mutual funds and stop-loss orders getting triggered when they shouldn’t have been. It’s about how high-frequency traders have turned exchanges into casinos, how the markets are truly broken, and how it’s only a matter of time before they implode and take the economy down with them.

But the bottom line here – the real bottom line – is  all about you and your money…

Markets are tired. Stocks are weak. That’s the backdrop.

There’s no good news anywhere. The United States had an upward gross domestic product (GDP) revision indicating 3.7% growth for the second quarter, but the economy grew at an annual rate of only 2.2% in the first half of the year.

Europe is slipping backward again. China is sinking in quicksand and could turn monstrously ugly. Japan is foundering. Oil and commodities are depressed and telling us there’s no demand… no growth anywhere.

Against such a moribund backdrop, when stocks collapse – establishing new lows below their 200-day moving averages – and then bounce, it’s those new lows that traders and investors fear.

And they should fear them.

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