Predicting the market is nearly impossible. Yet when there is a crash, we can somewhat predict what ‚could‘ happen based on past events, like for instance the market crash of 1929.
It all starts with an event that has a huge impact. Currently it’s the Corona-Virus that’s causing a lot of uncertainty as governments are forced to juggle the demands of our health and our economy.
In such a situation we want to be able to at least foreshadow what could happen next in order to adjust our behavior accordingly. From past events that lead to a market crash it is possible to identify a basic pattern that can be divided into 5 phases:
Phase 1 – Denial: Despite all the news about the event that could cause the economy to crash people need a certain time to realize what’s happening
Phase 2 – Panic: Once they realized that there is a real threat, they start to panic
Phase 3 – Exhaustion: After the first sell off people tend to believe that it’s over and start buying again which usually leads to a short up trend
Phase 4 – Realistic Judgement: Now people start to realize the long term effect and start selling again
Phase 5 – Resignation: Investors are losing faith which leads to a final sell off
Watch the full explanation here (use Chrome browser):