Is a Market Crash imminent?
Recently there have been two discussions of a possible market crash. The first warning comes from the Bob Janjuah, the credit strategist at RBS. The second is a more nuanced discussion coming from Todd Harrison, who writes at Minyanville.
The chance of a Market Crash is unlikely. Understand that Market Crashes are tail (low probability) events. Even if we accept that stock returns are not normally distributed but have fat tails, even fat-tailed events are still relatively low probability events.
Market Crashes occur because of the Wily Coyote effect. (Remember when he runs off the cliff in the Roadrunner cartoon, looks down and realizes that there is nothing beneath him?) In order for that to occur, investor sentiment needs to be fairly sanguine. Given that we have had two discussions of a possible Market Crash within the space of a week and the most recent AAII sentiment survey readings are now in the bearish territory (contrarian bullish), it seems unlikely that Wily Coyote has stepped off that cliff.
All this doesn’t mean that the equity market can’t fall – it’s just unlikely to crash. I have been looking for a panic sell-off to mark an intermediate term bottom (see my recent post). Mark Hulbert reports that current sentiment readings, while bearish, isn't bearish enough for a capitulation bottom. This suggests a scenario where the market breaches its March lows and continues to decline.
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