Why does the stock market crash, and how can I predict the next one?

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Why does the stock market crash, and how can I predict the next one?

Leonardo Da Vinci was arguably the most accomplished person to come out of the Renaissance period.

In his Codex Leicester, Leonardo tried to answer why the sky is blue.

His answer:

“I say that the blue which is seen in the atmosphere is not its own color, but is caused by the heated moisture having evaporated into the most minute, imperceptible particle, which beams of the solar rays attract and cause to seem luminous against the deep, intense darkness of the region of fire that forms a covering above them.”

So basically, he believed that water vapor was responsible for blue skies.

He was proven to be quite wrong…but the surprising answer didn’t come until more than 300 years later in 1871.

What’s the answer you might ask?

Lord Rayleigh, an English scientist discovered the effect known as scattering.

When light hits a molecule in the atmosphere, the light scatters, illuminating the sky.

The reason why the sky is blue however, is because Rayleigh’s theory predicts that blue light is 3.2 times more likely to scatter than red light.

So the blue overwhelms the red light, and the sky is blue.

I tell you this story because even popular theories by the most well known scientists are often wrong.

Da Vinci’s theory about “why the sky is blue” was wrong for 363 years.

In 2000, I set out to answer this age old question: Why does the stock market crash, and how can I predict the next one?

Most of the hypotheses I ran into during my research revolved around “market internals.”

Formulas like cumulative advance/decline lines – the number of advancing stocks minus declining stocks.

Then there’s TRIN, McClellan Oscillators, VIX, put/call ratios, odd-lot shorts…the rabbit hole goes pretty deep.

But none tested very well when you let the computer do the calculations instead of “eyeballing” it.

I began to think it was impossible to predict the next crash. They seemed to happen so randomly, which means I was constant checking charts and scanning the news.

But then I learned about the government’s forced reporting of certain size funds – banks, insurance companies, hedge funds, pension funds…the BIG PLAYERS on Wall Street.

These are supposedly the players that rig the whole system through the lobbying of politicians, yet here they are, heavily regulated by the U.S. government.

They must not believe in honor amongst thieves or they wouldn’t allow it to happen.

Anyway, this data led to a startling discovery – that following a certain group of traders has led to a sell signal ahead of every crash over the past 2+ decades.

Every other theory about why stocks crash is simply a symptom of the buying and selling done by this group of traders.

We can all see the sky is blue, but knowing exactly why was actually never fully understood until the 19th century, for the same reasons very few understand why and when crashes happen — they're looking at the wrong information.

With Election Day near, and the worst performance of the S&P 500 in years, it’s imperative that you read my latest analysis on the stock market here.

Trade smart,

 

Dan “Prince of Proof” Murphy