Forecasting Crashes of the Stock Market

 

Impact of Cycles versus Bubbles

at the

Dawn of the 21st Century

 

The stock market can crash whether or not a bubble exists. A showcase was the smashup of 2011 which popped up in tune with the long-range pattern of bombshells but otherwise without any good reason.

The pointless breakdown had one positive outcome. Given the confirmation of the running sequence of crackups, the schedule of flaps appeared to be on track in spite of the partial derailing linked to financial crisis of 2008.

For the wordly investor, the main event of 2011 was the blowup of the stock market in the U.S. and elsewhere, along with the bedlam in kindred fields such as commodities and currencies. As is often the case, the mayhem caused by the participants in the arena – be they part-time amateurs or full-time professionals – was for the most part a premature and avoidable ordeal for the entire community.

The teardown of the markets was prompted by the specter of a full-blown recession in the global economy within half a year or so. One reason for the jitters stemmed from the fitful progress of the industrial nations such as the United States, Britain and Japan. Another factor lay in the brouhaha over the debt crisis in Europe, along with widespread fears of a breakup of the euro along with the collapse of the regional economy.

For a number of years, the politicians in the developed world had been going out of their way to prop up the distortions in the marketplace that arose during the run-up to the financial crisis of 2008. Instead of prolonging the malady, the politicos ought to have left the economy alone to heal itself. Better yet, public policy could have helped to undo the damage done throughout the entire meshwork of production and distribution. Thanks to the counterproductive moves of the pols, however, the economy was doomed to struggle and flail for many years to come.

On a positive note, the crash of the stock market in 2011 showed up in sync with the long-running schedule of meltdowns. For this reason, the sequence of blowups appeared to be on track despite the partial derailing linked to financial crisis of 2008. As a consequence, the next crackup of the bourse could well occur around 2017 in line with the ongoing chain of flaps in the modern era.

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Note: This report is a revised and extended version of an article published last year titled Forecasting the Next Crash of the Stock Market. The new publication is available from major retailers of electronic books. An example of the latter is Amazon, whose offering can be accessed by clicking the image below.

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Top 3 Exchange Traded Funds for the Middle East

 

ETF Comparison for

Egypt, Israel and Turkey against USA

For the worldly investor, a handy way to access the Middle East – including the frontier markets of Egypt, Israel and Turkey – is to take up the corresponding exchange traded funds (ETFs) listed in the USA. In this article, we examine the performance of the index funds in the context of the American market which serves as the bellwether for the bourses of the world.

The ETFs are compared in terms of growth along with the risk entailed. For a balanced view of performance, the period of evaluation should cover a stretch in which the market has experienced a boom as well as a bust. The index funds can then be weighed in view of the return on investment coupled with the degree of volatility.

These factors are examined for the index funds dealing with Egypt, Israel and Turkey; namely, EGPT, EIS and TUR respectively. Moreover, the three pools are compared against the behavior of SPY, the flagship fund for the American bourse.

Comparing Exchange Traded Funds

To obtain a rounded view of performance, an investment vehicle ought to be assessed over a longish period that includes at least one upsurge and one blowup of the market. As a counterpoint, though, the field of exchange traded funds is still in its infancy. For this reason, a lot of funds are relative newcomers to the marketplace.

A case in point is the Market Vectors Egypt fund, which trades in the U.S. market under the ticker symbol of EGPT. The communal pool was launched only in February 2010. As a result, the index fund does not have much of a history.

Even so, the turmoil in the equity market over the past year turns out to be an advantage for our purposes here. Given the crash of the U.S. bourse in the second half of 2011, a span of two years is more than sufficient to include an upswell as well as a meltdown of the market.

On a negative note, though, a couple of years is scarcely enough to lend a lot of weight to precise tallies of performance for any type of asset. For this reason, we will rely for the most part on a qualitative survey of the index funds.

In line with earlier remarks, the U.S. bourse serves as the queen bee of the stock markets round the globe. Moreover, the most popular benchmark of the American market among professional investors lies in the S&P 500 index. The latter yardstick is represented by the index fund flying under the banner of SPY.

In this environment, we will compare the performance of the exchange traded funds for the Mideast against their U.S. counterpart. We begin with a visual scan of the action in the marketplace, then take a quick look at a clutch of numeric results.

Graphic Portrait

In sizing up any kind of asset, an initial step is to examine a graphic display of the market. Moreover, a composite chart of the price action can provide a visceral grasp of the relative performance of the vehicles.

For this purpose, we turn to Yahoo Finance (quote.yahoo.com), the most popular portal for investors on the information highway. In the chart below, the blue line depicts the behavior of SPY over the course of 5 years ending in May 2012.

By contrast, the red curve portrays the path of the index fund for Israel. Meanwhile, the purple arc shows the corresponding trail for Turkey.

The disparity in age amongst the funds is plainly visible in the display. For instance, the vehicles for both Israel and Turkey came to life in March 2008. Since each vessel is less than half a decade old, its path does not cover the full breadth of the chart. 

As an aid to grasping the relative performance of the assets, the lines for both EIS and TUR start off at the corresponding level for SPY. In other words, the price levels have been recast so that the curves for Israel and Turkey upon their inception match up with the status of their American counterpart at that stage. Given the common point of reference, any divergence among the arcs from that point onward reflects a gap in performance.

From the diagram, we can see that SPY thrashed around violently over the span of half a decade. By the end of the assay period, though, the index fund managed to recover most of the losses suffered during the financial crisis of 2008 as well as its aftershocks.

The chart above spotlights the fact that the frontier markets were much more volatile than the U.S. Despite the tumult, though, the index fund for Turkey ended up pretty much where it started upon its debut in the marketplace.

Meanwhile, the vehicle for Israel was less flighty than its Turkish counterpart. On the downside, though, EIS has been unable to shake off the doldrums since the crash of the stock market in the second half of 2011. No doubt a big reason for the funk lies in the ongoing war of words over the program of nuclear development in Iran, a flap that could easily lead to a military clash in the years to come.

On the other hand, the green line on the chart portrays the movements of the index fund for Egypt. In line with the norm for most countries, the Egyptian bourse plunged as the U.S. market slumped in spring 2010. On the upside, though, EGPT began to recover during the second half of the year.

Then a bombshell popped up at the beginning of 2011, as a popular revolution in Egypt toppled the dictator who had ruled the country for nearly three decades. In the muddle that followed, the nation stumbled along without any form of government to speak of. Not surprisingly, the stock market went into free fall for the remainder of the year.

On the upside, though, EGPT has been recovering smartly since the turn of the year. The rebound reflected an uplift in investors’ spirits as they awaited a general election to install a genuine president during the summer of 2012.

Performance Figures

As we noted earlier, the exchange traded funds for the Middle East can only offer short histories. For this reason, it makes scant sense to quibble about small differences in performance.

Even so, we can examine a few numbers for the sundry vehicles. According to Yahoo Finance, EGPT turned in a return of negative 10.32% over the course of a year ending on 30 April 2012. On a cheery note, however, the index fund sported a healthy gain of 36.58% since the beginning of 2012.

By contrast, the communal pool for Israel clocked a payoff of negative 24.12% over the span of 12 months ending in April 2012. On the other hand, the performance over the course of three years ending on the same date came out to positive 9.60%. Another cheery result was a gain of positive 10.36% since the beginning of 2012.

Meanwhile, the index fund for Turkey suffered a return of negative 25.18% over the span of 12 months ending in April 2012. On the upside, though, the payoff over the past three years came out to plus 21.96%. Moreover, the gain since the onset of 2012 was positive 25.89%.

Wrapup of Past and Future Prospects

Over the long haul, the frontier markets of the Middle East represent some of the most promising tracts for the cosmopolitan investor. On the downside, though, the entire region has had a long history of strife and chaos since at least the dawn of civilization.

On the bright side, the popular revolutions across the Middle East over the past couple of years has brought the light of democracy to an expanding fraternity of nations. The Arab spring is a watershed that will surely usher in a wholesome era of peace, stability and growth throughout the region in the millennium.

In that case, the beleaguered nations of the Mideast will be able to spread their wings and fulfill their potential in earnest. For this purpose, the assets at hand span the gamut from petroleum reserves to human resources.

In the meantime, though, the intrepid investor has to contend with the gorgon of high volatility in return for the prospect of bountiful returns over the decades to come. In this effort, a promising place to start is to sift through the U.S. bourse and mull over the lineup of exchange traded funds focused on Egypt, Israel and Turkey.

Further Information

In sizing up an asset for investment in any domain, the prospective return has to be weighed against the risk entailed. The crucial factors to consider are surveyed in the section on Financial Risk at MintKit Core.

A primer titled “How to Invest in Exchange Traded Funds” talks about the crucial issues relating to growth and risk for the popular vehicles. The review also applies the generic concepts to a case study of index funds for the emerging markets of Brazil, China, India and Russia.

The data available on exchange traded funds is often patchy, faulty and/or misleading. The stumbling blocks, along with defensive moves for the guarded investor, are discussed in an article on “Cruddy Information on Exchange Traded Funds”.

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