Stock Market: 3 Reasons Why a Crash Could Happen in 2016

stock market crashIf you are a stock market investor, know that we may be headed for trouble, as we could see the stock market crash in 2016 for several reasons.

First, we are seeing investors reduce their risk exposure to the stock market, as demand for small-cap companies plummets. Small-cap stocks are risky bets and whether investors are buying or selling them says a lot about overall risk appetite. With this said, below is a price chart of the Russell 2000 Small Cap Index, a bellwether index that tracks the stock prices of small-cap companies.

After making its all-time high in June of 2015, the Russell 2000 has been in crash mode. It’s down 20% and currently trades well below its 200- and 50-day moving averages (MAs). At the very core, this tells us that investors aren’t as friendly towards risky small-cap stocks as they were before—a big negative for the stock market.

Second, big “hot stocks” aren’t doing well either. Companies like Facebook, Inc. (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc. (NASDQ:AAPL), and Twitter, Inc. (NYSE:TWTR) are all down sharply this year. These stocks were market leaders in 2015, but investors are selling these “brand-name” stocks here in 2016.

Russell 2000 Small Cap Index Chart

Chart courtesy of www.StockCharts.com

Finally, look at the following chart of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). This index is also referred to as the “fear index” of the stock market.

Volatility Index Chart

Chart courtesy of www.StockCharts.com

Over the past three months, the fear index has jumped 60%. This shouldn’t go unnoticed. The VIX jumping significantly is not a good sign for the U.S. stock market, as it tells us that fear of a stock market crash in 2016 is growing among investors.

What to Expect Going Forward in 2016

In 2016, I expect a broad market sell-off; we’ve already seen signs of it.

Aside from what I have written above, corporate earnings and revenues are in full retreat. How can we have a rising stock market when the S&P 500 is posting consistent back-to-back earnings and revenue contractions?

Over the past few years, investors have taken the key stock indices way too high. If you are a student of history like me, you know this was a result of irrationality and nothing else. Irrationality gives a false sense of security to investors. Eventually, reality comes into play and when it does, it could feel as if the rug was pulled out from under our feet.

Dear reader, what we see on the stock market now is just a preview of something bigger headed our way in 2016—a stock market crash in 2016.

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