Are We on the Verge of a Stock Market Crash?
The Russian ruble, South African rand, and Brazilian real are all getting hammered, along with intense selling capitulation that, when combined, are driving the stock market crash of 2016. In my previous article, I discussed the coming stock market collapse and I was calling for stocks to sell back in mid-December, prior to the current market reckoning.
In mid-December, I became extremely bearish toward the price charts of the NASDAQ 100 and Russell 2000, both of which were showing a bearish double top formation.
Since then, the NASDAQ 100 has lost 12.25%, while the Russell 2000 is down 14.68%.
While many of you are probably scrambling around looking for answers to the stock market crash in front of us and staying up at night, the reality is that this kind of abrupt selling has occurred numerous times in the past, including in 1987, 2000, and 2008.
Some of you neophyte investors probably don’t even know what a bear market is, having never actually gone through one with money at risk.
Don’t worry about googling the term “bear market” or “stock market crash.” Instead, just take a look at the stock screens and the sea of red currently driving the extreme selling.
Chart courtesy of www.StockCharts.com
While technically the NASDAQ and S&P 500 are not yet in official bear market territory, the small-cap Russell 2000 is down 25% from its high and hurting. Additionally, a closer look shows that more than 50% of the S&P 500 stocks have plummeted into a bear market. This is something I have warned about in the past when I commented on how only about 13% or so of U.S.-listed stocks are above their 50-day moving averages (MAs) and only 5.5% are above their 200-day MAs.
Welcome to a Bear Market
Folks, the bear is here. Yes, we could see a bear market bounce, but I doubt the gains will be sustainable, given the current global stock market risk. We would need to see a major positive catalyst surface before there is any chance of positivity returning this year.
At the beginning of the year, I thought the S&P 500 could advance up to 10% this year, but with the current state of distress, I’m now thinking breakeven would be a good start.
For neophyte investors, the world is not coming to an end, despite the fact that it may look that way.
Things will eventually stabilize and begin to improve. The question is: when? I don’t have a crystal ball, nor can I predict a bottom. However, what I do know is that things will improve.
We are seeing some buying after major selling, as evidenced last Wednesday. The NASDAQ was down more than 3.18% intraday, but it managed to attract some big-name technology buying that cut the loss to a mere 5.26 points by market close. There was firm buying on weakness in the big-name tech stocks.
While it’s unlikely the buying bias is back, any buying support after major selling is encouraging.
Heck, this may turn out to be a great investment opportunity, albeit the stock market crash could pick up steam and challenge new multiyear lows before finding a base.
My experience in bear markets is to take a deep breath and slowly look for opportunities on the selling chaos after a stock market crash.
After six-plus years of a Federal Reserve-induced bull market that was fueled by easy money, we are now seeing what happens when things begin to unwind and the stock market is required to fend for itself without easy money from the Fed.
Akin to a deal with the devil, investors enjoyed the six years of gains, but now it is payment time.
An Easy Way to Protect Yourself
At this point, I’m going to emphasize again the need for insurance against potentially more downside moves.
You should consider having some put options in place to help minimize the downside moves. The value amount of puts should roughly equate to the value of your portfolio, meaning a $100,000 portfolio should have $100,000 in protection.
It is not cheap, but this strategy will pay off if the stock market crash worsens. If stocks hold and rally, you lose the premium, but so what? Think of puts on stocks akin to insurance on your house, car, or other valuable assets. You would have insurance in place for these assets no matter what, so why not for your investment portfolio? It’s the best way to survive the coming stock market crash.