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Another Look at How the 2014 October Surprise Changed the Stock Market

The one prediction I’ve made over the past years on this blog that came the closest to looking wrong has taken some time to gain perspective on. When I predicted the stock market would crash in the fall of 2014, it did take a big plunge, but it immediately spiked back up, so I couldn’t exactly call it a crash and claim I was right, given how fast it appeared to recover at the time and given that it didn’t even drop 10%.

Now, with almost another year behind us, we can see that late September and October 2014 really was a definitive turning point for the stock market. While it was not an all-out crash, it was a game changer for sure, as the chart below demonstrates.




More on that in a minute, but first a little history on one other prediction that I think was fundamentally right, though it didn’t play out quite as stated.


The previous I predicted a stock market crash


The only other point since the start of the Great Recession where I had said the market would crash was when I wrote to a friend that it would crash in August of 2011. (One of those letters I posted here after starting the blog. It was that period of letter writing and my second (in my view) correct prediction of what would happen that caused me to start writing this blog. I had not settled on August, as of that letter, but I did later in my writing to him, and you can see I was leaning that way strongly even in that letter. I never got around to posting all the letters because the blog at that time was struggling, and I didn’t have the time to go back through them all and post them.)

The drop that happened then did not turn into an all-out crash either, but it was very significant to where it is often referred back to by commentators today. There is only one reason it didn’t become an all-out crash. The Fed launched immediately launched a shock-and-awe round of quantitative easing, the likes of which the world had never seen, in order to save the stock market from its certain destruction.

That campaign became the Federal Reserve’s biggest QE period to date, which only tells you how severe the August 2011 crash would have been, given that it took such an enormous amount of stimulus to pull the market out and put it back on the trend that the Fed appears to be aiming for (while disingenuously claiming that it is not aiming for any market trend at all).

My basis for predicting that a crash would happen in August 2011 was that I was completely certain the Republicans would continue their battle of brinksmanship over the national debt to such an extreme that it would cause the U.S. credit rating to drop. That would be a first time in history the U.S. credit rating dropped, and would be quite jarring to the entire world.

I was certainly that Republicans were completely convinced they could safely gamble with the nation’s credit rating to the last minute because they knew that they would not let the country default. So, they fool-heartedly believed they could take the nation to the stroke of midnight on a credit default in order to wrench the best deal out of the Democrats without hurting its credit rating because they knew they would not actually take the nation into default.

I was certain they were convinced the credit rating would never be affected because they would not actually default. As I told my friend in repeated letters, they were blind to the fact that credit-rating agencies would not wait to the last minute to downgrade the nation’s credit rating. The rating agencies would have as much apprehension about their brinksmanship as the Democrats would have, and so the nation’s credit rating would get downgraded before that final hour came.

That is exactly what happened, and the stock market swooned into apoplexy, as I was certain it would. It took a massive action of the Federal Reserve to pull us back out of that disaster. (Not that the Fed has truly created any recovery, but it ended the extreme peril of the moment.)

[Note that I will just as gladly criticize Democrats wherever necessary, as I think blind commitment to party lines that have already failed repeatedly to create a sustainable recovery is one of our biggest problems. People need to end their party loyalty and re-evaluate their ideology.]

I believed (rightly) that Republicans were blind enough and over-confident enough to think their brinksmanship would have no repercussions so long as they didn’t actually default on the debt. I knew this game was being played out when the market was enfeebled because of the end of QE2 and end of Operation Twist by the Fed. A non-recovered market that was ready to sink back into the belly of the Great Recession without those artificial life supports would not withstand such a blow of confidence.

The Fed, however, saw the severity of the peril, once the drop was well over the edge and the size of the cliff below them became apparent, so they jumped in with the “shock and awe” announcement of indefinite QE (i.e., the end of their stimulus would only be determined by the economy’s successful recovery and not by a time limit this time, and the QE would come in massive predictable monthly doses, not in lump sums. $80 billion of new money a month given to the banks that own the Federal Reserve for as long as it would take to bring economic recovery.)

The drop in the market was so extreme in terms of where it would go that it took the biggest stimulus action the Fed has ever made to avert that demise. It was a greater measure even than what they had done to turn around the economic collapse that came from the housing crisis.


What the chart above shows about the October 2014 stock market drop


Here’s what I note in the chart above, which starts from the last crash I just spoke of. The trend line for extreme market bottoms (as measured by the S&P 500) throughout all the years since then is consistent. You couldn’t ask for a more even trend to the worst bottoms, including the big drop in October 2014. The top trend line is also perfectly smooth until you get just past the October plunge that was a game changer. The market recovered in November back to that trend line, but then rounded off to tops that have gone straight sideways for months.

This shows a clearly defined difference in how the market has performed since October 2014, where it has clearly bounded off a ceiling for almost a year now. How anyone can argue that the top is not in (as the permabears still do) is beyond me. The top rounded off abruptly at the end of 2014. Then the tops held completely flat for four months, and finally the tops have rounded downward in the past month and a half. You don’t get a more obvious ceiling than that. 2014 ended, as I said it would after the November bounce, with a large rounded top that has gone into a decline. The next step I said it would take is to go over the cliff. That kind of major top indicates to me the clear end of a long bull run.

That’s the top line. The bottom line, however, has worsened since this snap-shot was taken and has now broken the lower bound of the past five-year trend. So, the tops have rounded downward now, and the bottoms are deepening.

Now look at this next chart:



This gives a better sense of the scale of the October plunge, but what I really want you to notice is the row of spikes at the bottom of the chart. Those measure the daily divergence of the market’s close from the previous twenty-day average to show how the market is deviating above or below its short-term trend.

Notice that the periods where the spikes away from trend in the bottom line tend to group downward start slightly ahead of drops in the corresponding line above (the daily closes of the S&P 500). That pattern continues all the way up until the present drop where they happen simultaneously. What that means is that all of the drops in the S&P 500 daily closes prior to the present drop happened in periods where the market had already begun moving downward from its trend. But the present drop happens in a period where divergence in the market each day was not downward from the twenty-day average because the trend of the twenty-day average was already down. In other words, the current drop happened when the the trend was already falling downward, and then the market fell off the cliff from there. (In other words, the market had rounded over the top, was heading down, and then fell off a cliff, just as I said at the end of 2014 would turn out to be the case.)

So, the market fundamentally changed after October 2014. We’re now on a very different kind of ride where the trend has been downward for some time, and the daily drops are steeper still. If you want to think that is not the end of a bull market, go ahead … to your own peril.

Finally, here is where the S&P 500 last closed. You can see the rounding-downward trend more clearly and see that the new low reached a bottom that clearly broke the trend line of all past bottoms.




I don’t know how the end of a bull market could be more clear.

The stock market rounded off, fell over one cliff, got a big bounce in the last couple of days (as I said it would while it was still falling), and will soon fall over the next cliff. Total economic collapse (like the Great Depression and the start of the present Great Recession) happens in a series of cliffs, not in one straight fall. Whenever you drop that far with each fall, you tend to bounce fairly high off the bottom before going over the next cliff.

The top was in some time ago, but the big, giant heads that fill your T.V. screen never see it before it happens, almost never see it as it happens, wonder if it is going to happen shortly after it has happened, and then all wonder about why it happened long after it is finally undeniable to everyone else on the planet. Listen to them at your own peril.

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