Doomsday Prophecy Revisited: 1987-Type Market Crash is Now 30 Days 'Over Due'

June 25, 2014

On April 2, USA Today published an article with the title: “Is a 1987-type market crash 37 days away?”

The article spread like wild fire and tripped off an avalanche of ueber bearish media coverage.

The USA Today article painted the following doomsday scenario:

“The market could be in some serious trouble in 37 trading days. In 37 trading days, the ongoing bull market would be 1,311 trading days old, says Jim Paulsen of Wells Capital Management. That is a scary date because it was on the 1,311 trading day after the start of the 1982 bull market that the Standard & Poor’s 500 suffered its biggest one-day crash in history.

Normally these kinds of things are just market oddities. But investors are taking this one seriously.”

The S&P 500 (^GSPC) chart below (featured in the same article) supposedly confirmed the strong correlation and implication of a crash.

May 24, 2014 was ‘D-day,’ according to this rudimentary method (counting days to determine a market top doesn’t deserve to be labeled as analysis).

Crabs in a Bucket

The wave of media pessimism reminded me of an analogy a friend from New Orleans introduced to me: 'Crabs in a bucket'. He explained that 'down here' when you buy a bucket of live crabs for your backyard boil you never need a lid. As soon as one crab crawls to the top the others pull him back down.

The bearish media coverage ‘scared every bullish crab back to the bearish bottom,’ leaving plenty of buyers to drive up stocks.

I commented on the bullish message of the media’s fear mongering in many commentaries and Profit Radar Reports:

April 4: “A watched pot doesn’t boil and a ‘watched’ market doesn’t crash."

May 6: “Too many bears spoil the crash just as too many cooks spoil the meal. Investors are expecting a correction. In fact, too many investors are expecting a correction. The market rarely does what the masses expect. Quite to the contrary, the market likes to surprise the investing herd.”

May 13: “Fed fund rate suggests S&P 500 rally. For now, the Fed fund rate confirms what we foresaw previously last week: Higher prices.”

Nutty but Effective

Including media headlines in a market analysis model may seem like nonsense to some, but it’s a contrarian indicator that’s right more often than wrong.

At the beginning of the year I formulated a 2014 S&P 500 forecast based on seasonality and cycles, technical analysis, Elliott Wave Theory, support/resistance levels, divergences (or lack of divergences) and various sentiment measures.

This forecast projected a May high at S&P 1,954, which is basically where the S&P 500 (SPY) stalled. Here’s why 1,954 is important and what’s next:

Updated 2014 S&P 500 Forecast

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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