This is What “ALWAYS” Happens Before a Stock Market Crash!

Summary

The video script discusses the cyclical nature of market crashes, based on the speaker's experiences from the 1999-2000 dot-com bubble to the 2025 market downturn. It highlights key warning signs of financial crises, including tight monetary conditions, credit market stress, excessive leverage, retail euphoria, and geopolitical uncertainties. The speaker shares insights on strategic positioning during such times, emphasizing the importance of reducing leverage, diversifying into uncorrelated assets, and using hedging strategies to manage risk. The script also reflects on current market conditions in May 2025, exploring whether recent trends are the beginning of a larger market correction.

Takeaways

• 😀 The market experiences cyclical events where extended bull runs lead to eventual crashes, as seen in past cycles like the Dot-Com bubble, the 2008 Financial Crisis, and the COVID crash.
• 😀 Tight monetary conditions, such as raising interest rates, are a key indicator of an impending market downturn. This reduces liquidity and makes borrowing more expensive.
• 😀 Stress in credit markets is often the result of tightening monetary policy. As credit becomes scarce, leveraged positions begin to break down, triggering broader market issues.
• 😀 Excessive leverage and retail euphoria are dangerous market conditions. As investors pile into overvalued assets, they set the stage for a crash when the market turns.
• 😀 Smart money starts selling while retail investors keep buying, creating a distribution phase where the market fails to progress despite high enthusiasm.
• 😀 Market downturns are often preceded by geopolitical or political shifts that disrupt business clarity and investor confidence, leading to economic slowdowns.
• 😀 During market downturns, it's essential not to panic sell. A strategic approach, such as reducing leverage and raising cash, helps manage risk and position for future opportunities.
• 😀 Hedging strategies, like using options for portfolio insurance, allow investors to mitigate risks during market declines, helping protect assets and even position for future gains.
• 😀 In the current May 2025 market, tight Fed policies, rising credit stresses, and excessive leverage point to potential market instability.
• 😀 The 'MAG 7' stocks—Apple, Amazon, Meta, etc.—have driven a large portion of market gains, showing signs of euphoria and excessive valuation, followed by significant losses in the recent market correction.
• 😀 Insider selling in 2024 was at its highest in a decade, indicating that those with the most information were taking profits while retail investors chased bullish trends.

Q & A

What was the speaker's first experience in the equity markets?

The speaker's first experience in the equity markets was as a trader during the 2000 to 2003 dot-com bubble and crash.

How does the speaker describe market behavior leading up to a crash?

The speaker explains that markets typically experience an extended bull run that creates euphoria, retail excitement, easy money, overvaluation, and high leverage. This makes many investors positioned the same way, and when market conditions change, a crash follows.

What are the five conditions that often precede a market crash?

The five conditions are: 1) Tight monetary conditions, 2) Stresses in the credit markets, 3) Excessive leverage and retail euphoria, 4) Smart money begins selling, and 5) Exogenous political or geopolitical changes.

What is the impact of tight monetary conditions on the market?

Tight monetary conditions, such as raised interest rates and restricted liquidity, make credit harder to access, which eventually bursts asset bubbles and leads to a market crash.

How does the speaker explain the stresses in the credit markets?

The speaker compares the credit market to a bathtub with a running tap. When the Fed tightens conditions, the liquidity (water) starts draining, making it harder to sustain asset bubbles. Overleveraged markets begin to break down, leading to broader market stress.

What role does excessive leverage play in a market crash?

Excessive leverage, often fueled by margin trading or derivatives, amplifies market gains during an uptrend. However, it worsens the situation during a downturn, as investors are forced to sell when their positions are liquidated due to margin calls.

What is the concept of smart money selling and how does it relate to market crashes?

Smart money refers to institutional investors or insiders who begin selling stocks at elevated prices during a market peak. This creates a distribution phase where the market appears to hold steady but doesn't progress upward, while retail investors continue to buy into the market.

How do exogenous political or geopolitical factors contribute to market instability?

Political or geopolitical changes, such as trade disruptions or shifts in government policy, can create uncertainty and confusion for investors, leading to reduced corporate spending, hiring delays, and a slowdown in economic growth, all of which can trigger a market correction.

What strategies does the speaker suggest to navigate potential market downturns?

The speaker recommends not panic selling, reducing leverage, increasing cash holdings, diversifying into uncorrelated assets, and considering hedging strategies using options to protect the portfolio from downside risk.

What is the significance of portfolio insurance or hedging during market corrections?

Hedging through options allows investors to protect their portfolios from significant losses during a market crash. This strategy provides cash when markets decline, which can be reinvested when the market rebounds, thus mitigating the impact of downturns.