Will the stocks get back on track OR has something bigger started?

Minus 1.34 %. Minus 1.36 %. Minus 0.76 %. Minus… and the same thing based on the same stencil. You want a tip what is it?
It is the table of the development of world’s stock indexes read one after another. The Japanese Nikkei 225, British FTSE 100, Pan-European STOXX Europe 50 and so on and on. Only the America is in the moment I’m writing this article missing from this text because of the time zones. When I was writing here on 13th October a warning about the stock markets and claiming that my nose is intuitively smelling something bad I honestly hoped that I get to publish this warning before the first sparks fly. (Simple intuition is sometimes more than entire analytical apparatus of let’s say central bank.)

It could seem that the spark has already flown. But – frankly, let’s be careful about judging it like that. So far it can still be “only” short foreplay even though it is going on for two weeks and so far the global stocks are lower “only” about 5 % in average. Either way in the spirit of my last warning I am slightly tilting towards the probability of the other option: which is that this dropping trend will last long.

Firstly: One look at the thrilling graph of various polls of public opinion (according to BBC) is suspiciously reminding me same thrilling graph released just before the Brexit vote. At that time the chances of for and against opinions touched and suggested that the trend might shift. Just like in the case of Trump and Clinton when the preferences of both candidates met at 45 %. And we all know how it ended up in the case of Brexit. Is it perhaps the same situation repeating itself? There are a few things in the trends of public polls suggesting that; even the fact that the opinion which is generally considered to be the more “rebellious” one (meaning for Trump) which is therefore underrated in surveys is catching up just like in the case of Brexit. We also know very well that the financial markets fear Trump. If Trump wins, which seemed to be highly unlikely according to the polls until now, then it’s going to be a clear knockout for the stock markets. And long lasting fall will be guaranteed.

But with the probability just as high (actually according my private guess with probability even slightly lower) we can expect Clinton to win. But even then the stocks won’t be safe. We have the end of the year coming up with possible rising of the American interest rates and spring ending of the bonds buyout programme in Europe is almost here as well… And remember how poorly the stock markets started this year? And remember also that the reason for their poor start was just one raising of the interest rates by the American central bank last December, which could be repeated now?

Here’s the thing: Stock markets are overdone, I don’t doubt about it so the question isn’t if this bubble will burst but WHEN will it burst. To be more specific: The question is if this bubble has already burst or if the stocks manage to put it together again for a while.

At least three more warning signs showed up in last three or four weeks, suggesting that the burst of the price bubble could be on the horizon. Firstly, the chances of Trump’s victory dramatically grew. Secondly, the condition of the European banking industry got revealed bit more. And I don’t mean only Deutsche Bank or Italian Monte Paschi that is only the tip of an iceberg. Thirdly – which might be the most important even though it’s the most difficult to notice on the first sight – many stock indexes dropped under something which we call “support” in last 48 hours.

This support is the index level which many speculators assume to be for some reason a key level according to so-called technical analysis. To prevent excessive losses they set in their business a system, so-called automatic instruction to trade. Those basically without the interference of human factor start selling the stocks when the support level is reached – but that way they are pushing the prices even lower. And the spiral is automatically getting into motion. We can clearly see for example the indexes S&P 500 or DJIA reaching this support level.
Let’s summarize it. Especially in the case of Clinton’s winning the stocks might shake it off and their drop doesn’t have to be a prophecy of any bigger drama. But at the same time, the chances that the opposite will happen are growing. Wednesday after the elections will solve this puzzle to certain extent.