Sentiment Speaks: What To Expect Before The Market Crash

Week after week many of you are bombarded by articles suggesting that a market crash is about to occur. I am here to tell you when you can recognize it is about to happen. But, for now, I think it may be averted for at least several more months.

What is most interesting of late is that the market has had to digest not only the banking issues that have developed and seemingly shocking many, but it has also had to deal with further rate hikes by the Fed.

Well, first, I want to outline that the baking issues should not be shocking to those that have been following our work closely. Since last year, I have been writing public articles outlining the issues we see in the banking sector. In fact, just weeks before SVB collapsed, we wrote an article warning about the exact issue which took SVB down:

Maturity mismatch is also being ignored.

This is another major issue that is not being tested by the Fed. Many U.S. banks have a large maturity mismatch between their assets and liabilities. For example, in our recent article on Capital One (COF), we showed that 84% of the bank's securities have maturities longer than 10 years. Capital One does not disclose the average maturity of its deposit book, which is a major part of its liabilities; however, it's highly likely that it's much less than 10 years, especially given that Capital One currently does not offer deposits with a term of more than five years. Such a maturity mismatch between the bank's assets and liabilities would likely lead to major liquidity issues in a volatile environment and be a significant risk for depositors.

As one of my 1,000 money manager clients noted the other day:

Funny. A colleague said "no one saw this issue with the banks"... I just laughed and told him Avi from EWT was all over it.

And, as I have been saying, this is likely only the tip of the iceberg. If you want to read a bit more about the issues we are seeing in banking sector, you can feel free to read the public articles we have written over the past year right here:

Safer Banking Research Articles

But, I do not think that the banking issues are going to cause a crash just yet. While I do think this will occur, I do not see the set up for this potential at this time. Rather, I think we may still see a rally before any such set-up develops.

You see, many people believe in black swans causing market declines. Yet, as Ralph Nelson Elliott said almost 100 years ago:

At best, news is the tardy recognition of forces that have already been at work for some time and is startling only to those unaware of the trend.

In other words, the market will often tell us that something bad is about to occur before the bad news comes to light. For those that have followed my work closely over the years, they have seen me note something like "based upon the market downside set up, it would seem that something bad is about to come to light within the news." And, this has happened quite a number of times.

At this point in time, I cannot say that I have a clear set up suggesting something bad is about to happen. In fact, the market has been taking the bad news of late in stride. So, let's discuss the set-up to understand what we may be seeing over the coming weeks.

While the market action has consisted of a lot of whipsaw, we have been able to identify almost all these twists and turns. And, this member summarizes what many of our members have told us lately:

Just have to say... I took detailed notes on Avi's weekend report... OMG, talk about nailing it. I'm sitting here checking off waves and levels. We haven't finished yet but damn he gives me confidence in this market. And not just SPX, TLT and SI [silver] too... just wow... and thanks.

Yet, despite all the whipsaw, the market is seemingly still trying to set up a rally to 4300SPX over the coming weeks. So, I am going to try to keep this relatively simple, as there are two complex structures we are currently tracking. Rather than discuss the complexities here, and confuse some of you, I will summarize the commonality of both structures.

If you remember my last public article several weeks ago, I outlined my expectations for the market to drop to the 3750-3810SPX support region, and begin a rally off that support. As we now know, the market dropped to a low of 3809, and began a very choppy rally off that support. So, to keep this simple, I will say that as long as the next pullback holds over the 3810SPX support level, I am tracking a set up which is pointing us to at least the 4300SPX region in the coming weeks.

However, if the market breaks down below the 3810SPX support, it could open the door to a potentially large decline over the coming months. For now, this is not my expectation, but I have to know when I need to change direction.

Yet, should the market complete a rally to at least the 4300SPX region, then we could be in store for a set-up for a market crash to begin later this year. While it is clearly premature to discuss this potential, I will note that I will be suggesting to our clients that they raise cash as the next rally is completing.