23:35 GMT +322 April 2018
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    Brave New World

    Beware the '5th Wave'

    Brave New World
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    John Harrison
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    We have been through a very tumultuous two weeks on the stock markets. The Dow Jones and major stock exchanges all over the world dropped by as much as 13%. But what does this actually mean? Will things calm down now, or is this the beginning of something even more serious?

    Richard Knight, a British client advisor at Key Investments in Moscow has interesting views on the subject.

    Richard starts off by describing what happened. "It was the fastest ever correction, one reason for this is that algorithms kicked in, way faster than humans can. It's been long overdue, everybody's been expecting it, we've had a correction of something like 1% of the past two years which is nothing. Every market which wishes to remain a healthy has to have a correction. Corrections are normally when corporations take profits. They need to take profits every so often and as long as the correction is not too steep, then it is just a correction. The Dow dropped 13% in one week. Normally a correction is 11% or 12%, so this is just about still a correction. Another reason that it is a correction is because the other assets — the conventional safe havens such as commodities didn't budge."

    Financial experts the world over have been saying that the reason behind this correction is the success of the American economy which is driving inflation up and which would then lead to higher interest rates. Richard disagrees: "I am not a strong believer in fundamentals driving market prices at all. What they [the investors] are looking at is algorithms, at the price, which is key. One of the things that nobody asks is: 'why have we been on the bull run for so long?' We have been on this bull run since 2015. They'll put it down to this, that or the other but in fact it is all to do with numbers, with currencies in particular…"

    As regards the future, Richard says that this correction has been long overdue. "We are in a 10 year cycle. You can break that 10 year cycle down into 5 waves. We are on the 5th wave. After the 5th wave, comes what's called an 'ABC' correction. That's when we all go back to school….We are heading for quite a substantial fall, basically of 30% or 40%….I think it's going to peak in May, and they are already buying back in droves, so I think we'll finish February flat, in other words they have brought the entire correction back; the algorithms work just as quickly on the way down as they do on the way up."

    One of the interesting things about this correction is that the price of gold has not dropped as investors pile back into the market. "I am very much a gold buff," Richard says. "What's interesting about gold is that it's coiling. I think we tested 13.66 recently [USD/oz.], yesterday we had a jump of about $25 on gold. My long term forecast on gold is 15.79. When I say long term, I mean by the end of this year. What's interesting is that gold is on wave 5, just starting. All the other markets are coming to the end of wave 5…"

    So what has happened over the past two weeks is a correction, not a crash according to Richard Knight. He says that investors should now be very careful about investing because are approaching the top of "the fifth wave…."

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    stock markets, finance, Dow Jones Industrials Average Index
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