In the last days we have seen chaotic movements in stock markets. Indexes experienced falls all over the globe. Phenomenon which got my attention was one that I explained few months ago in one of our webinars.

The blueprint I am talking about lets you distinguish between a serious slump and just a temporary correction.


How did we get here (slump)?

In the significant majority of all of the biggest slumps we can see that they did not follow their maximums. Rather the biggest falls were superseded with so called wave A and B. How to spot those market signals?

a) Wave A – the first serious stage of falls.

b) Wave B – share prices rebound from the fall but to lower levels than those before Wave A.

c) Wave C – falls return and if they break minimums of Wave A, then a slump of 18-24 months will occur.

Below I attach analyses of a number of crises from the last 85 years:

Crisis of 1929

Prepared by Piotr Glowacki (

b) Collapse of 1969

Prepared by Piotr Glowacki (


c) Crash of 1974

Prepared by Piotr Glowacki (

d) Slump of 2008

Where are we now?

Prices of the S&P (the most important index of shares in the world) rose continuously for 6 years. Knowing that an average length of a boom in the last 80 years was 3 years and 4 months it shows that the  last cycle lasted for extraordinarily long time.

Shares reached their maximum in August 2015 and soon Wave A pushed prices down. October gave possibility of a rebound but it was quite short of returning to levels from 3 months back. Since the end of 2015 through beginning of 2016 we can see rapid dips. Drops that pushed the S&P below Wave A bottom – note that it follows the benchmark explained above.

What I am explaining here is by no means any oracle but it is worth comparing patterns from last 100 years and realising that this peculiarity initiated the slump in 70-75% of cases.


If you still not convinced then let us take a look at the pricing of shares

In the US and other developed markets responsible for 87% of capitalisation of all stock exchanges – shares are very expensive. Price/Equity ratio (P/E) is at 21. Year ago it was 18.8. Twelve months ago stock prices were on higher levels with simultaneously lower P/E. This tells us that profits of the NYSE companies are falling quicker than price of their stocks.

Situation does not improve when we use the CAPE (or Shiller’s P/E). In the US CAPE equals 24. You can find higher values only in Ireland, Denmark and Japan. Most important: levels above 20 signals extremely expensive shares.

High probability of further drops is also proven by a reduction of a margin debt – debt used to pay for shares (red line). In the last 21 years we saw such rapid reductions only in the time of a slump. The only exception was seen in 2011 when shares were losing points due to the chaos in Greece and investors in panic were selling shares decreasing their debt exposure.


What will FED do?

You saw for yourself that many factors suggest that we are in for a serious nosedive and maybe even for another 2008 meltdown. It seems like the only thing that could change this trend would be a coordinated action of central banks. Until now they tried everything they could to sustain the boom; holding interest rates at near-zero levels, increasing a supply of currency on unprecedented scale and buying shares (the Bank of Japan and the Swiss Central Bank admitted that).

Increasing interest rates by the FED was an act of desperation enabling the scrapes of credibility to still stick to this institution. Now to save the day the FED could lower the interest rates justifying it by “special circumstances” (stock exchange slump). Lowering interest rates with concurrent start of a next round of QE (again on unprecedented scale) might convince investors to continue shopping and buy some time.



Although I am not the fan of technical analysis, charts I presented above do not instil optimism. We should not ignore them. Other arguments for the discounts to continue are very high share prices and the length of today’s boom. Depending on the methodology it is the longest or the third longest boom in the last 80 years.

Apart from some extremely cheap shares in the Russian market I am not exposed to stock market volatility at all. I have some GDXJ (small gold/silver mining companies) but they are not correlated with stock exchange movements. Still I do not “short” stocks as in my opinion falls were very sharp and a recovery is to follow. For shares in general, I believe 2016 will be closed on levels way lower than what we see today.