Stock Market Crash: Charts Reveal Dire Warning for Investors in 2016

Stock Market CrashHere’s Why Stock Market Crash Could Happen

Know that the chances of a stock market crash in 2016 are increasing. Be careful. If you own stocks, your portfolio could be on the line.

As it stands, a significant amount of indicators are suggesting that a stock market crash could be in the books for this year. I recently wrote about three stock market indicators that are suggesting a crash is coming here: “Stock Market Crash: These Charts Reveal a Dire Warning for Investors.”

Now, I see three more indicators suggesting investors are getting nervous and equities could be in for a rough ride in 2016.

Three Reasons to Be Bearish on Stocks

One of the indicators that suggest a stock market crash could happen soon is the Chicago Board Options Exchange (CBOE) equity put/call ratio. This ratio looks at how many put options and how many call options there are on individual stocks. If this ratio is above one, it means more investors are betting against stocks. With this said, look at the chart below and pay attention to the areas marked off by the black vertical rectangles.

CBOE Options Equity Chart

Chart courtesy of www.StockCharts.com

This indicator is powerful. It tells us about investor sentiment. Looking at the chart above, you will notice that when the equity put/call ratio remains above the 1.00 level, we see declines in the stock market (look at the S&P 500, the black line below the chart). When it makes a consistent move above 1.10, we see much bigger losses in stocks.

Just look at what happened in 2008. Unfortunately, we see something like that happening again. Simply put, the equity put/call ratio suggests a stock market crash could be in the works.

Another indicator suggesting a stock market crash in 2016 is gold prices.

Know that the yellow precious metal is what investors run to when they are fearful; it’s a safe haven investment. Since the beginning of the year, as key stock indices plunged, we have seen notable buying in the gold market.

Look at the chart below of the spot price of gold. It’s one of the best-performing assets in 2016 so far.

Gold - Spot Price Chart

Chart courtesy of www.StockCharts.com

Gold currently trades above its 50- and 200-day moving averages (MAs). This suggests both long-term and short-term trends for gold prices are turning in favor of the gold bulls. In other words, fear is increasing among investors.

Lastly, the most important indicator suggesting the stock market could be in trouble in 2016 is earnings. It can’t be stressed enough how critical earnings are to the health of the stock market; if earnings decline, the stock market declines.

This is exactly what is happening right now. Please look at the chart below of S&P 500 earnings since 2011.

SPX Earnings Chart

Chart courtesy of www.StockCharts.com

It was all good until the first quarter of 2015, when earnings started to plunge. Note that the chart above shows results until the third quarter of 2015. We are hearing about the fourth-quarter earnings now and they are not looking good.

Also, going forward, earnings are expected to decline in 2016. This is dangerous news for the stock market.

The Bottom Line…

Investors beware! The sell-off on the stock market that we have seen so far in 2016 could just be an indicator of what could come next. Don’t rule out an outright stock market crash just yet. Preserving capital could be the best investment strategy as it stands.

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