With the S&P 500 returning back to its all-time highs, the bulls are starting to break open the champagne. But for anyone willing to look past the rosy headlines, the chance of a stock market crash in 2016 is growing.
October produced the best gains since 2011 as the major stock market indices staged an impressive rally of over eight percent and in the process recovered several key technical levels on the charts. The narrow buying was targeted with the brand name technology stocks and big banks as the majority of stocks continue to struggle.
Now as we move into the final two months, the stock market will look to the retail sector for any evidence consumers are spending, albeit based on what we have been seeing, I doubt the market will be pleased with the metrics.
The reality is that without firm leadership and broader buying of stocks, we could be seeing a pending top for the market and a stock market crash in the worst case scenario should China and the eurozone tank and the domestic economy tailspins.
While the S&P 500 and NASDAQ are key levels, I simply don’t see a sustained upside break at this juncture given the overhanging market risk.
We have an earnings season that has seen about 72% of S&P 500 companies beat on earnings but only about 43% on revenues. This doesn’t bode well for an economy on the up. The advance Q3 GDP reading was light at 1.5% and I could see the stalling continuing based on what we are witnessing domestically and globally.
The Federal Reserve suggested interest rates could rise in December, but the soft GDP reading fuels uncertainty. A rate hike could be delayed until at least March 2016.
Of course, while the stock market wants certainty as far as interest rates, the low interest rate environment has also been largely responsible for the six-year bull market.
Chart courtesy of www.StockCharts.com
Pros Suggest a Stock Market Crash
Portfolio manager Larry Glazer told CNBC that central banks worldwide are the catalyst for the market advance here; and not because of earnings. He added, “That’s not a healthy dynamic.” (Source: “Don’t drink ‘Kool-Aid’ behind rally: Fund manager,” CNBC, October 23, 2015.)
Glazer is correct in his assessment. Simply look at how stocks behave after news of interest rate cuts and stimulus infusion. Whether it’s the eurozone, China, or the Fed, stimulus and low rates translate into higher stock prices. Take this away and investors are forced to analyze macro fundamentals and corporate America and we know that’s not great.
I’m a big believer in the use of technical analysis for hints. If you listen to technician Peter Eliades of Stockmarket Cycles, the stock market may have topped this year. (Source: “Technician: Markets may have topped out this year,” CNBC, October 23, 2015.)
And then there’s technician Ari Wald of Oppenheimer who has determined a relationship between big buybacks and market tops. In an interview with CNBC, Wald suggested when S&P 500 companies with the highest buyback ratios see their share price struggle as is currently the case; this could foreshadow a market top based on the Oppenhemier S&P buyback index. (Source: “This index signaled two crashes—and it’s falling again,” CNBC, October 30, 2015.)
My view is the stock market could be showing a near-term top unless we see evidence the global economies are strengthening on their own accord and not simply driven by cheap money. Hang on, as the final two months of the year should be quite volatile.