Are the Current Stock and Financial Market Mania's about to Crash ?

By: EWI

Stock Markets tend to periodically rally into dangerous financial manias, the problem that investors have is not in recognising that one is in an financial mania, but when the resulting bubble will burst with a stock market crash.

The recent rally in the global and US financial markets, including the Dow Jones, increasingly has all the hall marks of a financial mania according to Elliott Wave International analyst Peter Kendall. This distinction is important to recognize as the markets rise, because the manias always result in a CRASH that takes them back beneath their original starting point.

Peter Kendall recently published his research into current financial and stock manias throughout the world in (SFO) Stocks, Futures and Options magazine. The article, titled "Financial Manias and the Trade of a Lifetime," suggests an even more spectacular end for the current global manias: "The speed and global scope of the unfolding credit crisis suggest that most of the fast-rising markets of the last decade will crash in unison ," he writes.

Elliott Wave International invites you to freely read the full five-page article with charts from the October 2007 SFO magazine by Elliott Wave International's Pete Kendall called "Financial Manias and the Trade of a Lifetime."

As co-editor of The Elliott Wave Financial Forecast Service, Peter Kendall searches for trends that help traders to move in and out of financial markets by comparing other historic manias with the impressive rise of the Dow Jones Industrial Averages since the late 1970s, he focuses on the skyscraper chart pattern that they all have in common. The four historical manias of note are the Dutch Tulip mania of the 1630s, the South Sea bubble of 1720, the U.S. stock crash of 1921-1932 and the dot.com bust of the 1990s and early 2000s. Once you can see the similarities with the current mania, you will be better prepared to face the music when the stock market crash comes. As Kendall writes, "once the belief that the markets will always rise becomes widespread, it actually signals the start of a price swing that tends to be a career-breaker for any trader who tries to oppose it."

He also discusses many current manias, such as Japans Nikkei Stock Market Index, which has yet to return to its starting point, after a manic rise to its all-time high in December 1989, and the Dow Jones, which reversed from its rise in 2000 but made a U-turn in late 2002. The target for the starting point for the Dow's mania as shown in the chart included in the article is at the Dow Jones 1000 level, which is substantially below the current levels of 13,300.

Peter Kendall is also writing a book about Financial Manias, titled The Mania Chronicles , which describes five telltale signs that can help investors to tell the difference between a regular bull market and a financial mania that's heading for a crash.

It's a mania if:

1. There is no upside resistance, and rising prices seem to be perpetual.
2. Everyone in the market looks like an expert.
3. There is a flight from quality investments to riskier investments.
4. As financial bubbles pop in one area, they bubble up in others.
5. The crash after the peak takes back ALL of the gains the mania made.

No. 5 can be viewed only with hindsight. But the first four signs provide essential clues to what's transpiring in the markets.

"By studying past mania experiences, investors and traders can gain valuable insight into the collective emotions that drive their markets," writes Kendall. "It's possible to make significant money in the advancing stages of a mania with no knowledge of its existence. But there is nothing like recognizing a mania for what it is in real time to help a trader keep those gains and deal with the relentless crash after it peaks."

In the last part of the SFO article, he asks the key question, Are we at the peak yet? Find out his answer by reading the whole article for yourself .

Susan C. Walker writes for Elliott Wave International , a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speech writer for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.

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