Next Stock Crash: Is Dr. Doom Right This Time?

Stock CrashMany of us are wondering: when will the next stock crash be? Are we on the brink now? And how bad will it be?

Well, Marc Faber (aka Dr. Doom) suggests the next stock crash could range from 20% to as high as 40%. If you have followed the contrarian investor, you would realize that he has long been a bear, even during the amazing bull market that started in March 2009.

However, if you had bet on his stock market prognosis then, you would probably be losing money and missing out on what was one of the best opportunities for stocks over the past 50 years.

While I don’t fully agree with Dr. Doom, I do share some of his bearish views towards stocks at this time—despite the record high made by the NASDAQ on Monday.

Folks; the stock market rally is over six years old. And based on common reasoning, it is vulnerable to selling. We recently saw a minor market adjustment of about four percent from the highs. But the selling didn’t last, with stocks subsequently rallying back to new or record highs.

Also Read: Stock Market Crash in 2015 is Coming, Despite Widespread Bullishness

Why the Next Stock Crash Could Be Around the Corner

The negative sentiment in the market in June was triggered by the uncertainties in Greece, which defaulted on several debt payments and was on the edge of an exit from the eurozone. The country subsequently agreed to a strict austerity program in return for additional funds. In the process, it’s preventing the spread of havoc throughout the region as well as the global economy.

I can honestly say that much of what happens next will depend on the technology sector, namely the NASDAQ Composite. The index has led the broader market this year, up close to 10% as of Monday. Initially, strong results from Google Inc. (NASDAQ/GOOG) drove the buying. But there has since been a pause after a soft guidance and “iPhone” sales from Apple Inc. (NASDAQ/AAPL).

The stock market is edging lower as of July 22nd. About 42% of U.S.-listed stocks are trading above their key 50-day moving averages (MAs) versus 57% a month earlier. Moreover, 49% of stocks are above their 200-day MAs compared to 60% a month earlier. This suggests a downward-moving stock market. Adding the fact that volume on up-days continues to be light and this suggests a lack of conviction.

NYSE Percent of Stocks Chart

Chart courtesy of www.StockCharts.com

On the charts, blue-chips and S&P 500 companies continue to underperform growth, technology, and small-caps in 2015. The Dow is up less than one percent this year.

The Dow and Russell 2000 broke below their respective 50-day MAs on July 21, which remains a battle line for the major stock indices.

We could see more selling to come. Consider that the S&P 500 is off a mere 0.75% from its high while the Dow is off 2.36%. This suggests there could be renewed selling on the horizon.

Also consider the continuing stock market bubble in China, particularly with the hyped up A-shares. The Shanghai Composite Index is down about 25% from its high, so it’s technically in a bear market. Around 20% of the listed companies are still frozen and unable to trade. My fear is that we could see a sell-off of these stocks when the halt is lifted.

Shanghai Stock Exchange Composite Chart

Chart courtesy of www.StockCharts.com

In light of a possible market crash, remain prudent and err on the conservative side. Don’t chase rallies. Rather, use them to dump losers and realize profits on winners. Also make sure you have some put hedges in place to help protect against downside weakness.