Stock Market Crash in 2016: Here’s How the S&P 500 Could Drop 27.6%

Stock Market Crash in 2016If You Own Stocks, You Could Be in Trouble

If you are buying stocks, you should be thinking twice. A stock market crash could be in play in 2016. You do not want to get stuck in it.

Looking from a technical analysis perspective, stock markets just don’t want to go higher. Please look at the chart below of the S&P 500.

S&P 500 Large Cap INDEX

Chart courtesy of www.StockCharts.com

Notice something interesting? Since early 2015, the S&P 500 has been trying to break above the 2,125 level, but it has been rejected over and over again.

What does this mean? At the very core, it suggests buyers run out, and sellers take over at that level. Dear reader, not too long ago, the S&P 500 moved above 2,100 but failed to break above, again.

Don’t take this lightly whatsoever. As I see it, this is a warning that suggests a stock market crash could be ahead.

If you look back to what happened in 2007, when key stock indices formed a major top, we saw a very similar pattern. Key stock indices couldn’t break above a few key levels. A couple of months later, we saw a rigorous sell-off.

Charts aren’t the only evidence that makes a strong case for a stock market crash in 2016. Fundamentals suggest the same.

Corporate earnings, one of the most basic factors indicating why stock markets rally or crash, have been plummeting. This is something not being said in the mainstream, but you have to keep a close eye on earnings.

Consider this: as of May 13, 91% of the S&P 500 companies have reported their financial results for the first quarter of 2016.

Combined, they are reporting a decline of more than seven percent! If this is the final number (I doubt it will change much), then it will be the fourth consecutive quarter when corporate earnings of the S&P 500 companies have declined. This is the longest decline since 2008 and 2009, when the financial crisis was at its peak. (Source: “Earnings Insight,” FactSet, May 13, 2016.)

What’s worse is that earnings are expected to be dismal going forward as well.

Analysts are currently predicting a decline of 4.6% in earnings for the S&P 500 companies. But here’s what you need to remember: these earnings tend to be revised, so don’t be shocked if this number gets much worse. Also, if it is actually the final number, then the second quarter of 2016 will mark the fifth consecutive decline in corporate earnings for the S&P 500 companies.

Mark my words: plummeting corporate earnings have never ended well for the stock market. This time around, I doubt anything will be different.

On top of all this, you shouldn’t forget all the uncertainty in the global economy regarding what central banks do next. As it stands, the Federal Reserve is focused on raising interest rates. Other central banks around the world are working to keep them lower.

This disparity in monetary policies around the world could cause investors to question what to do next. They could panic and sell stocks.

Remember, after 2009, the biggest factor driving investors towards stocks was the monetary policies of central banks around the world.

Stock Market Outlook: Major Declines Ahead

It can’t really be stressed enough: the best investment strategy for investors right now is to preserve capital. The mainstream will never say this, but a stock market crash is a very likely scenario in 2016.

How much could the stock market crash?

You see, in 2013, key stock indices broke above the highs made in 2007. If a stock market crash does come into play now, these levels could act as a support level—around 1,500. That’s 26.7% below where the S&P 500 currently stands.

Be very careful.