Things are looking quite bearish for global stock markets at this juncture. Predicting the timing of the next great stock market crash is crucial in protecting one’s capital or even maximising one’s trading profits. A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors. They often follow speculative stock market bubbles.
To understand the future, one must understand the past. Our brief analysis will dwell into past major stock market crashes in Malaysia and in specific, we will be looking at past movements in the index trend of KLCI / KLSE. The historical trend for KLCI / KLSE (since 1978) is shown as follows:
1st Crash: 1981
The first major crash for KLCI occurred in 1981. Prior to the crash, the KLCI / KLSE had ascended from 141.20 points (1978) to 546.7 points (Jul 1981), with an increase of approximately 287% over 956 calendar days. Subsequently, the index fell more than 60% to 217.86 points (1982) over a period of 405 calendar days.
2nd Crash: 1984
The second major crash for KLCI occurred in 1984. Prior to the crash, the KLCI / KLSE had ascended from 212.8 points (1982) to 421.9 points (1983), with an increase of approximately 94% over 336 calendar days. A double top was also formed in 1984. Subsequently, the index fell more than 60% to 169 points (1986) over a period of 818 calendar days.
3rd Crash: 1987
The third major crash for KLCI occurred in 1987. Prior to the crash, the KLCI / KLSE had ascended from 305 points (May 1986) to 472 points (Aug 1987), with an increase of approximately 181% over 448 calendar days. Subsequently, the index fell more than 53% to 223 points (end 1987) over a period of 118 calendar days.
4th Crash: 1997-1998
The fourth major crash for KLCI occurred between 1997 and 1998. Prior to the crash, the KLCI / KLSE had ascended from 848 points (1991) to 1,336 points (1994), with an increase of approximately 173% over 875 calendar days. Subsequently, the index fell more than 79% to 268 points (1998) over a period of 552 calendar days.
5th Crash: 2000
The fifth major crash for KLCI occurred in 2000. Prior to the crash, the KLCI / KLSE had ascended from 767 points (1998) to 1,027 points (2000), with an increase of approximately 294% over 578 calendar days. Subsequently, the index fell more than 46% to 549 points (1998) over a period of 427 calendar days.
6th Crash: 2008
The sixth major crash for KLCI occurred in 2008. Prior to the crash, the KLCI / KLSE had ascended from 606 points (2003) to 1,529 points (2008), with an increase of approximately 152% over 1772 calendar days. Subsequently, the index fell more than 43% to 803 points (2008) over a period of 284 calendar days.
When Is The Next Crash?
Kindly note that the above analysis is a simple desktop analysis in order to gain a broad understanding about past stock market crashes in KLCI.
Key observations are as follows:
- Each stock market crash is distinct in its own;
- Intervals for stock market crash appear to be 3, 8 and 10 years;
- Uptrends generally last longer than downtrends;
- Higher average prior up % per day will potentially lead to a higher decline average fall % per day;
- The quantum of decline in a stock market crash averages at 56.8% (with a range of between 43% – 79%); and
- One possible way of predicting an upcoming stock market crash is when an index has gone up significantly (~ 94% – 294%)
So, what is happening to FBMKLCI?
The FBMKLCI has since increased 1,063 points or 126.9% over 1,940 calendar days from 2009 to 1,900 (2014). This translates to an increase of 0.07% per day, which is relatively lower than the prior uptrend rate in past stock market crashes of KLCI. Although it does not appear to be a drastic increase, this may warrant a potential future downward reversal due to the following two key reasons: (1) the total increase percentage is within the range of percentage increase in past stock market crashes; and (2) further refinement of timeframe is required for the analysis of the past crashes so that a more appropriate comparison can be made.
What is important to note is that the recent correction in 2015 (from 1,900 to 1,501) only represents a percentage decline of slightly above 20% from FBMKLCI’s peak. This is relatively lower than (i) the average percentage decline of 56% of past crashes ; and (ii) the lowest percentage decline of past crashes of 43%. In other words, to qualify for a stock market crash, we need to observe an additional percentage decline of at least 23-36% from FBMKLCI’s peak (i.e, 1,900) to 836 – 1,089 points before we can conclude that the market has bottomed out. Assuming a 3, 8 or 10 year interval period for the next stock market crash, we may potentially see a major correction / crash happening between 2016 and 2019 (since the last stock market crash happened in 2008-2009).
DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE.