2 types of crashes

What are the 2 types of Stock Market crashes

Stock Market crashes are often sudden and dramatic with no warning. They can last for a short period of less than 1 month or can extend for years.

The S&P500 has demonstrated in over 100 years that US Stock Market crashes always recover eventually. The issue with Stock Market Crashes is:

(i) How severe is the fall

(ii) How long until recovery

1.1 Classification of Crashes

At Ultima Investment Services we classify crashes into one of three types:

(i) News Event Crashes

-Falls of less than around -8%

-Recovery in less than 3 months

(ii) Bear Crashes

-Falls of around -10%

-Recovery in less than 6 months

(iii) Big Bear Crashes

-Falls of -20% or more

-Recovery in 12 months or more

For traders and Fund Managers a major issue is how long to rebound or recover after a fall.

News Events Crashes recover very quickly in less than 3 months as there is no fundamental reason for a sustained crash. Big Bear Crashes can last for over 12 months (some such as in 2000/1 can last for 36 months).

What are the features of each crash type and can any can be predicted ?

1.2 News Event Crashes

Primary Cause:

A major negative news event such as:

-War(s)

-Oil or other Energy supply restrictions (export tariffs, embargoes etc)

-Adverse political policies that have a negative impact on business profits

-Trade import tariffs and other import/export restrictions

With these types of events, there is usually a sudden huge drop in the S&P500. Trading entities such as the e mini ES futures and others always hold a large number of algo stop loss orders that are executable 23 hours a day and for almost 7 days a week. When stop loss levels are hit, orders are filled at almost any price which escalates the price fall into a flood.

A common feature of news event crashes is that investors review quickly whether the event will have a major impact on business profits or not. With News Event Crashes, forecast business Earnings reported just after the crash starts by S&P500 companies do not indicate a significant fall in Earnings.

These types of crashes do not usually result in a major Bear down period over an extended period.

The S&P500 prices rebound quite quickly usually within three months.

1.3 Bear and Big Bear Crashes

Primary Cause:

Business Earnings crash.

Business profits fall for most companies when:

-Interest rates rise more than 2 to 3% as consumer spending is decimated (especially discretionary spending).

-Major political policies that reduce business profits such as:

-Escalation in employee wages

-Additional employment costs

-Additional compliance costs

-Anti business development approval processes

-New or increased taxes on consumers

With this type of crash, the S&P500 may fall initially a large amount, but more likely there will be a series of falls with false rebounds until business Earnings recover.

A major fall in Earnings over one Quarter is likely to lead to a Bear Crash. Huge falls in Earnings or accumulated falls over more than one Quarter is likely to result in a Big Bear Crash.

Companies issue EPS Estimates which are the best indication of business profits and how long the crash will last. Basically when Earnings recover, share prices will recover.

A Bear Crash continues for around 6mths. If it extends for more than 12mths it can be regarded as a Big Bear crash.

Disclaimer

The risk ratings and comments made in this report should not be regarded as

investment or trading advice. The Risk Ratings and comments made in this report do not indicate any trading method is profitable or that losses are not incurred. Seek professional advice before making any financial decisions based on the Risk Ratings or comments made in this report. Ultima Investment Services does not accept any liability for any losses or expenses incurred in applying the Risk Ratings or comments contained in this report.