Make no mistake -- the stock market might still be crashing

Monday was ugly.

After stocks saw their worst week in four years, markets started Monday deep in the red with the Dow plummeting 1,089 points before recovering some of its losses. All the major US indexes fell over 3% by the end of the day.

Tuesday feels like sunshine after a storm. M
arkets opened sharply higher with the Dow up 390 points, the S&P up nearly 2%, and the tech-heavy Nasdaq up over 3%.

While we might not be doomed to crash in the near-term, it would be a mistake to get complacent.

Generally, when people think about the tech and credit bubbles in the stock market, they tend to visualise a single crazy stock plunge that just keeps going and going in one direction.

However, when stock market bubbles come to a head, they tend make wild swings. In other words, they don’t just suddenly burst — it’s more of a wild up-and-down process.

In a January note to clients, UBS strategist Julian Emanuel zoomed into the stock market action during the previous two major market peaks to illustrate this important observation:

In a sentence, although the stocks are up on Tuesday — that does not necessarily mean everyone’s in the clear.

After all, for investors, it’s extremely difficult to tell if, first of all, the market is in the bubble, and second, if that bubble is bursting when it’s bursting.

So given the recent volatility, one can’t help but wonder if the stock market is in the process of crashing. Unfortunately, it will be a while before we can confirm whether or not that’s actually happening.

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