Is The Market About to Crash?

I co-wrote my first book back in 1979. The book was all about seasonal price tendencies for commodities. I had chapters on things we don’t trade anymore. I miss the days when I could trade iced broilers and Maine potatoes!

I first discovered seasonals in the late 1970’s and became fascinated with a technique that was showing a consistent gain or loss in the market. I figured that if a market made a consistent rally most years then I could find a way to make money from that tendency.

For example, what if corn consistently dropped into harvest. Shouldn’t I be able to watch that seasonality and then use a technical method to enter short the corn market when the seasonality shows that the market will drop. Of course I could!

It turns out that the stock market is also highly seasonal during certain periods of the year.

My seasonal analysis tells me that the stock market will likely drop by about 5% during the month of October into the month of November.

I normally pay very close attention to seasonals, but I also try to find a fundamental reason to support that seasonal tendency. So what is it that might cause a 5% drop?

I think that the trigger will be one of two fact:

1. Fiscal Cliff. Now that Syria and Taper have faded from the headlines, attention has shifted to the Fiscal Cliff. Senator Ted Cruz’ filibuster is getting live coverage and filling the airwaves and headlines with Fiscal Cliff news. I believe that is the main reason, along with profit taking, why the market is dropping over the last week.

The market has sold every time in the past when confronted with the Fiscal Cliff. And, each time, it rallies when a last minute deal is struck.

This time is a little different. Both sides are trying different tactics to muscle the other side to their will. I don’t think either side will win and we will end up with the same conclusion: kick the can down the road. But the differing tactics will cause more attention to be focused on the issue than normally and this will cause a bigger reaction than normal.

2. Fed Talk. Secondarily, it is possible that some Fed official will say something to cause the market to drop. I consider this unlikely but possible.

Seasonals are powerful. We have a fundamental trigger. We have a currently weak market. I’m nervous. I’m starting to set up some hedges to use if I see any further weakness.

I don’t think the market will crash. There are not the usual factors in play to cause that. But a 5% correction? Sure! That would be normal!

I’m not short the market but am very alert to get ready to hedge my long stocks.
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Notes

I’ve been in the US for about a month but am about to start another long trip overseas. This trip will take me to at least Hong Kong, Singapore, Sydney, and Johannesburg.

I love going overseas, except for the jet lag.

I love all the different cultures. Eating in the hawker stalls in Singapore. Riding the White Star ferries in Hong Kong. Basking in the beauty of the Sydney harbor.

I don’t know Johannesburg well yet but am hoping to spend a week there on this trip so that I can get to see it better.

I’m working on a project to teach trading to a bunch of teenagers in South Africa. We are working on this project with the government. Who knows if we will actually get the project going, but I like the idea!

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