Ignore the 'Crash' Forecasts

Calling for a crash makes for a great headline. Some call these folks "prophets," while others refer to them as fear mongers. But, either way, it isn't difficult to find these prognostications out there. Some say a crash could come at any minute, while others see it as being three to five years away. Some call for them weekly, and have done so for years upon years now, while others are new to the game.

While you rarely want to ignore information out there, especially when it's coming from very successful investors and traders, you can't get caught up by it and allow it to paralyze you. The irony is that we've already seen several crashes this year, but there were few headlines around them and even fewer predictions ahead of them. Crashes often occur without prediction, and without continued headlines.

I can think of three very prevalent areas that could have been called "crashes," this year, and many smaller such moves as well. In fact, to find the most recent "crash," we don't have to look very far. Granted, this one has grabbed more headlines despite the S&P 500 hitting new highs, but I don't know many who predicted it during the onset of the calamity.

Of course, I'm talking about energy. Energy names are a great example of how most crashes do occur: in slow-motion. A simple chart of Whiting Petroleum (WLL) provides a great example. The stock was trading above $90 as we entered September. As the price has fallen from that level to $35, it has not even sniffed that late-August close again. I think most would agree that a decline of 60% would be considered a crash.

Perhaps Whiting is alone, and the drop is something company-specific, but another glance at the chart tells us this thought is foolish. SeaDrill (SDRL) is down some 66.7%, Nabors Industries (NBR) is down more than 56%, Continental Resources (CLR) is nearing the negative 50% mark, Ecopetrol has lost 48% and Statoil (STO) and Apache (APA) are the "winners" of the group, since they are not quite down 40%. I even left out Petrobras (PBR), since it has some political challenges associated with its performance.

These are nasty, nasty numbers over just a few months, and where this stops is anyone's guess. It's hard to imagine much will improve until we flip the calendar.

Energy isn't alone. I already wrote about the crash in the gold miners earlier this year, and while the miners have rebounded some, even huge names such as Goldcorp (GG), Barrick Gold (ABX) and AgnicoEagle (AEM) are still down 20% to 30% for the quarter. The other obvious one is the Japanese yen. This currency was in free fall even before the advent of the Bank of Japan's massive quantitative-easing (QE) program. The yen has lost some 16% over the last six months -- a massive move for a major currency -- yet we seemed to brush this aside once the major QE news was out of the way.

While the media loves the explosiveness of a flash crash, or the idea of a repeat of 1929 or 1987 -- and don't kid yourself into believing the media doesn't want a repeat of that -- this isn't the typical action of a crash.

A crash is actually rather sneaky. It's like the overnight house guest who starts out just staying for the weekend and, before you know it, he's been there three months, eaten most of your food, broken several items of value, crashed your car and started dating your daughter. You spend most of your time in disbelief or living in the past performance of the securities. You spend days and weeks telling yourself it really isn't that bad and that things will be better tomorrow. Before you know it, you're down 60% and making room in your basements so your daughter and her new husband have a place to live.

Ignore the headlines. Pay attention to the slow-motion action and make sure you own a couch that is comfortable to sit on, but a nightmare to sleep on for more than a few days.

Long SDRL December puts, short SDRL January puts.