What If the Markets Really Do Crash?

The world as you know it is about to end…

An economic meltdown is imminent. Forget stocks. It’s time to cash up and prepare for the worst.

Well, at least that’s what many experts are telling us.

You don’t have to look far for a dose of negativity. Dire forecasts seem to be everywhere. And I’m not just talking about niche business websites. This is a mainstream story.

I’ve got a selection of quotes for you. They weren’t hard to find. All I did was Google ‘global crash’.

Have a read below…

A DEVASTATING market crash is due to wreak chaos across the world, following a debt binge worse than the lead-up to the 2008 financial crisis, a top investor has warned.

Lana Clements, Express UK, 22 September 2016

The world economy is hardly out of one global financial crisis and the odds are surging that another worldwide crash is about to begin.

David Brown, South China Morning Post, 27 June 2016

The chance of a share market crash is rising.

Patrick Commins, Sydney Morning Herald, 31 August 2016

I did a second search to get some balance. The key words were ‘global stock boom’. Do you know what I got? More headlines warning of bubbles, crashes and recessions!

This is scary stuff. There are a lot of experts predicting bad things — and their arguments are often compelling. I can understand why a lot of people are on edge.

‘What if…’

The media isn’t the only place I’m seeing concerns. Fears of a crash are also appearing in member emails. The words ‘what if’ are becoming more and more frequent.

Let me show you what I mean…

The possibility of a major market correction in the next four or five weeks following the U.S. Presidential Election is enough to put a chill down one’s spine.

Should it happen, and the stock prices go into a spiral gaping down by-passing our stop losses, we would be left reeling holding substantial losses and unable to bail out. What has your system in place to manage such event?

Member, Sunny

Sunny is a longstanding member. He’s been with Quant Trader since day one. While his specific concern relates to the US election, the prospect of a meltdown worries him most.

Now, I’d like to tell you that the worst won’t happen. But I can’t. I simply don’t know. The clever people making the scary predictions could be right. This might be the beginning of the end.

But the truth is, no one knows. Forecasts of a financial apocalypse are nothing new. They’ve been around since I began my career in 1991. And so far, they’ve mostly been wrong.

Sunny has an excellent question. He’s not after yet another opinion. Instead, Sunny asks, ‘What has your system in place to manage such event?

A history lesson

I’m going to answer this with three examples. These will show you Quant Trader’s response to past periods of market turmoil. All the examples are from back-testing.

Here’s the first…

Quant Trader Performance
Source: BigCharts
Click to enlarge

You’re looking at a chart of the All Ordinaries. It covers the period from July 1996 to July 1999.

This was a volatile time. It includes three seismic events: the Asian Financial Crisis, the Russian debt default, and the collapse of a major hedge fund.

The most violent fall was in October 1997. Stocks were at a record high. Then, without warning, the market lost 20% in a month. This includes a one-day drop of 12%.

Many people thought the financial system would implode. Here’s what one leading economist and hedge fund manager was saying in August 1998:

The collapse of Russia is having a profound impact upon the entire global financial markets… Of all the great financial panics in history, this one looks like, sounds like and moves like none other than 1929 all over again. The similarities of what we are living through have more in common with the fundamentals behind the Great Depression than at any other point in time.

Martin A Armstrong

Yes, this was a scary time. My employer, Bankers Trust, went out of business during this period.

Now let me show you how Quant Trader manages the uncertainty…

Quant Trader Back Testing

Click to enlarge

It’s not plain sailing by any means. This was an incredibly testing environment. The chart shows the hypothetical profits from long trades. It doesn’t include costs and dividends.

You’ll see the sharp drop near the middle of the chart. The Asian meltdown was in full swing. This is when stocks lost 12% in a single day. It’s the sort of situation Sunny fears now.

Let me be straight with you. Heavy falls are a reality of stock trading. The only way to avoid them is to stay out of the market. But I believe that’s a big price for an infrequent event.

An alternative is to use strategies to limit risk. You’ll still have losses, but you’ll have an exit route when things turn bad. You’ll also have a plan to get back in when conditions improve.

Look at how Quant Trader manages the fallout from the Asian crisis. There’s an initial loss as the market falls and exit stops are hit. The system then steadies before recovering to new highs.

Let me show you another…

Quant Trader back testing around September 11
Source: BigCharts
Click to enlarge

This is the All Ordinaries from January 2001 to May 2002. The big event of the time was September 11. If you were long stocks, you almost certainly lost money.

Here’s how Quant Trader performs…

All Ordinaries from January 2001 to May 2002
Click to enlarge

Quant Trader doesn’t escape the selloff. Most of the portfolio’s stocks fall. 50 companies trigger exit stops during the next two weeks. The system gives back much of the year’s profit.

As before, the results are only for long trades. I’m leaving out short positions. I want you to see how a long-only portfolio performs.

The flipside of a crash is the recovery. If you limit losses during the selloff, you’re in a prime position to take advantage of the upswing. This is exactly what Quant Trader does in the following months.

I have one more example. This is from more recent times.

Quant trader during fears of EU breakup
Source: BigCharts
Click to enlarge

You’re looking at the All Ordinaries between July 2010 and December 2012. This was during the European sovereign debt crisis. There was also a downgrade of the US’ credit rating.

This was another worrying time. Many experts were expecting the worst. Predictions of a second GFC were commonplace. But many of these warnings came after the big stock market falls.

Here’s what Quant Trader’s portfolio does…

Click to enlarge

Quant Trader gives back profits during the crisis. But, unlike the All Ordinaries, the system doesn’t go into the red. It exits trades as they hit their stops. This protects capital from continuing losses.

You may be wondering about the drop in Quant Trader’s profits (from $50,000 to under $10,000). Yes, this is a big fall. But it’s for a large portfolio. At the market’s peak, there were 204 open trades, with a hypothetical value of over $250,000. This should put the drawdown into perspective.

There’s no shortage of global concerns at present. Experts constantly remind us of the potential dangers. Many traders would be asking if they should be in the market at all.

But here’s the thing: You don’t need to know the future. Successful trading is about having a robust process — not a crystal ball. This helps you deal with whatever the future brings.

Yes, the markets could crash. That’s why we have exit stops. It’s also why spreading risk is so important. These strategies are aimed to help protect you from the worst scenarios.

I believe the biggest risk is to avoid the market completely. People ask me, what if the market crashes? I say, what if it doesn’t? In my experience, a good strategy ultimately comes out on top either way.

Until next week,

Editor’s note: Did fear keep you out of the market this week? Don’t worry if the answer is yes. Many people have been selling-up, preparing for the worst. But not Quant Trader — it has continued to identify strong stocks over the past few weeks.

Quant Trader specialises in finding shares that are on the rise. The system’s algorithms are constantly scanning the market for opportunities. It then gives you a buy signal, and calculates a unique exit stop.

And right now, you can get instant access to Quant Trader with a 30-day money back guarantee.

Try it. See if it makes sense to you. It could change the way you trade forever.

Quant Trader sources all images and charts above.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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