Forecasting the Coming Stock Market Crash

0 Comment

File this away in the “Weird Tales of Technical Analysis” folder. I have zero faith, and very little respect, for technical analysis, so this should be taken as snarky entertainment only, and not definitely not reasonable trading advice. If I ever choose technical over fundamental analysis, someone please put me out of my misery.

Worried about the Shanghai Composite Index as it rockets up higher than it should? Nothing to fear, the geeks are coming to your rescue with some solid advice, and some lovely technical blather.

The analysis comes from Technology Review, specifically the Physics ArXiv Blog. Bet you read that one on a regular basis, eh?

OK, two basic points here:

First, they say that they’ve found the telltale signs of a bubble in the growth rate of the Shanghai Composite stock-market index.

Hrrm. Nothing too exciting here. Hope this gets better.

And second, they say that this bubble will burst between July 17 and 27.

That’s what I’m talking about! Let’s see, today is the 16th, so I better go out and dump everything tomorrow morning.

Wait a minute, I don’t own any stock here. Guess that means I can stand back and watch the carnage from a distance. That’s a lot of fun, by the way.

Don’t think that this strangely specific forecast has been pulled out of the ass of this analyst. No, there is some serious methodology behind this, made quite clear is this passage:

The telltale sign of a bubble is a faster than exponential growth rate caused by a positive feedback mechanism that generates this nonlinear growth.

The faster than exponential growth rate is relatively easy to spot. According to the analysis done by Sornette and a few mates, the Shanghai Composite Index certainly seems to have had a faster than exponential growth–a 69 percent rise since October of last year.

Whether an unsustainable positive feedback mechanism is causing this growth isn’t so clear. Sornette and co suggest that what is responsible is the Chinese government’s massive lending spree designed to maintain its economic growth rate at 8 percent a year. China has maintained that kind of growth for some years now.

Let’s take at face value the idea that a bubble has formed. What of the prediction that it is about to burst? Just how this team arrives at such a precise date isn’t clear.

Yes, lots o modelin’ and calculatin’ going on here, but a cogent explanation of why July 16 – 27, well, not so much.

I’m waiting for this guy to be interviewed on CNBC or Bloomberg. Probably won’t happen until the market goes down (it will eventually). If it happens after the 27th, I’m sure an explanation will be forthcoming as to why the numbers were slightly off.

All hail technical analysis!