Stock Market 2016: These Three Things Suggest Bigger Losses Ahead

Stock MarketThe stock market has three major factors working against it here in early 2016. Corporate revenue and earnings are contracting, the smart money is ditching stocks, and technical analysis has turned outright bearish on stocks—this could all lead to a stock market crash in 2016.

Let’s start this analysis by looking at the contracting earnings and revenue of the S&P 500 companies…

S&P 500 Earnings Expectations Slashed By Big Percentage

As of February 5, 2016, 63% of the S&P 500 companies have reported their financial results for the fourth quarter of 2015. On average, S&P 500 companies are reporting a decline of 3.8% in their earnings and a 3.4% decline in revenue for the fourth quarter. (Source: FactSet, February 5, 2016.)

The fourth quarter of 2015 will mark the third consecutive quarter earnings have declined for the S&P 500 companies and the fourth consecutive quarter in which revenue has declined. The last time this happened was when the stock market crashed during the Credit Crisis of 2008 and 2009.

For the first quarter of 2016, earnings at the S&P 500 companies are expected to decline by 5.3%. Here’s the interesting part: at the beginning of this year, stock market analysts were expecting S&P 500 earnings to increase by 0.5% in the first quarter of 2016. (Source: FactSet, January 8, 2016.) Earnings estimates have been slashed by more than 1,100% in less than two months!

Smart Money Ditching Stock Market Fast

Another indicator yelling “stock market crash ahead” is the so-called smart money indicator. Saying the very least, institutional money is ditching stocks at a rapid pace.

Please look at the chart below of the National Association of Active Investment Managers’ Exposure Index. It shows what percentage of stocks active money managers currently hold in their portfolios.

NAAIM Exposure index INDX

Chart courtesy of www.StockCharts.com

In February of 2015, almost 100% of the portfolios of institutional investors were invested in stocks. Now, that number is only 22%. In other words, institutional investors have reduced their exposure to stocks by 78%. This tells us there is extreme pessimism toward the stock market.

Stocks Trading Below Their Long-Term Trends

Finally, the number of companies with their stocks trading above their 200-day moving average (MA) is plunging, as depicted in the chart below.

$SPXA200

Chart courtesy of www.StockCharts.com

As it stands, there are only 113 companies on the S&P 500—just 22% of them—that are trading above their 200-day MAs. This is the lowest number since 2011!

Stock Market Outlook for 2016

In 2015, as I have often said in these pages, the stock market spent the year putting in a huge top…a resistance level for stock prices that might last for years and years to come. As corporate earnings and revenue continue to contract, as institutional investors continue to be pessimistic about stocks, and as the technicals fall apart, a stock market crash could happen at any time.

Yes, I know the Dow Jones Industrial Average has shed 2,300 points (or 13%) since its May 2015 high. I’m saying stocks could fall a lot further.

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