Why Did Bangladesh Stocks Rise 30 Percent After the Building Collapse?

Aug 27, 2013Highlights

 

Why Did Bangladesh Stocks Rise 30 Percent After the Building Collapse?

By Nathaniel Williams for www.elliottwave.com

According to conventional wisdom, stock markets fall after bad news. And if any event ever qualified as “bad news,” it would be Bangladesh’s building collapse in late April. If you recall, an eight-story industrial building collapsed just one day after inspectors discovered cracks in the building and ordered an evacuation. Many garment workers were forced to return to work, and more than 1,100 died in the collapse. It was one of the worst industrial accidents in history.

By all accounts, Bangladesh’s Dhaka General Index should have plummeted. But that’s not what happened. Just one week after the horrific tragedy, the index began to rise — leading to a 30% surge in less than three months.

Could you have anticipated this seemingly unconventional market move? Yes, with the right tools.

And EWI’s Asian-Pacific Financial Forecast used those tools to stay ahead of the trend the entire way. Editor Mark Galasiewski (pronounced ‘gala-shev-ski’) studied the Dhaka General Index’s Elliott wave pattern mere days after the accident. He told his readers in the May 3, 2013, issue (emphasis added):

“The Dhaka General Index advanced in five waves … to a high in 2010. Since then it has fallen in five waves and is now approaching the end of the decline.”
In Elliott wave parlance, a completed five-wave move means a trend has run its course, so Galasiewski knew to expect a correction.But what about the Bangladesh tragedy? It took on a completely different significance to the stock market trend when viewed from an Elliott wave perspective. Here’s why: Bangladesh’s social mood (as reflected in the Dhaka General Index) had been falling for more than two years since the 2010 high, so it was deeply entrenched in a bear market. Galasiewski reminded his readers of Robert Prechter’s observation in the Nov. 2007 Elliott Wave Theorist that “commercial and industrial fatalities have tended to increase during bear market periods and recede in bull markets.” That issue of The Theorist also noted:
“Perhaps there is something about negative mood periods that can cause a lapse of judgment on the part of company managers and employees, potentially leading them into dangerous situations. Or perhaps the economic contractions that accompany negative mood periods force companies to attempt to do more with fewer resources, potentially raising the risks to employees.”
After this terrible tragedy, things could hardly get any worse. Social mood had no where to go but up. And if social mood were to improve, so to would stocks, though this was of little comfort to those who were affected by the tragedy.

 

 

The Asian-Pacific Financial Forecast’s analysis was spot-on, as this updated chart shows. Prices in the Dhaka General Index rebounded the next trading day and rose 30% in less than three months. (Not every forecast works out so well, but five waves completed in one direction do usually signal a change in trend.)