RBS issues global stock alert – The S&P 500 to slump by more than 300 points by September

Today RBS issued a global credit and stock alert as inflation paralyses the major central banks. In the interview for UK daily telegraph Bob Janjuah the bank’s credit strategist said “ A very nasty period is soon be upon us”

I haven’t seen the RBS report but judging from the interview I suspect that the main argument for issuing the alert is stagflation story.
The RBS prediction is going along my own expectations. However main argument for nasty drop of the global indexes is the interplay between investors ( a negative feedback loop). In coming days I plan to publish here several articles explaining how the negative feedback loop is now present in stock markets and how it is likely to trigger selloff within several next week s

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US equity markets are in negative feedback loop – in July S&P 500 is likely to plunge to 1150points

The current financial crises will have more serve and longer lasting-consequences than similar crises in the past. Credit contraction which is highly correlated with real economy cycle may be prolonged as the

1) FED ability to keep interest rates low may be limited

2) some mayor financial institution may prove yet to be insolvent

3) The banking sector regulation liberalization process is over as tax payers funds were involved to bail out troubled financial sector . Now regulators are likely to tighten control over the investment banking activities which could dampen further dampen credit expansion.

But this is not my main argument for steep market correction in the near term. To be correctly understood I’m not calling for master of disaster global scenario because there are countervailing forces at work. China, India and Oil producing countries economic growth remains strong. More importantly emerging markets governments have continued to acquire US assets even as the US yields has fallen which may be support for Bretton Woods II believers (here you can read the newest David Folkerts-Landau paper on Bretton Woods II and subprime crises)

My judgment on US equity market is based on macroeconomic logic and the Log Periodic Power Law (LPPL) developed by D.Sornette in series of articles. Based on models of imitation between traders and cooperative heading behavior Sornette showed that imitation leads in finite time to very large market highs followed by the crash.

In later papers it was realized that speculation and imitation also occur during bearish markets, leading to price trajectories that seem approximately symmetric to the accelerating speculative bubbles ending in crashes. “antibubbles” are characterized with a power law decrease of the price decelerating log periodic oscillations.

Anti-bubbles concept has been successfully implemented to Nikkei, S&P and gold markets descents (papers are available here S&P , Nikkei & Gold , Chinese equities& real estate )

I implemented Sornette methodology to the present S&P 500 data and I got very stable firt for first and second order log periodic oscillations. Lomb spectral analysis showed very strong log periodic oscillations amid descending trend.

The best fit with second order Landau Formula suggest that next local minimum S&P 500 index will reach close to the end of July 2008 when the index is likely to fall as low as 1150 points.

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