Stock Market Crash: This Is Why Stocks Could Get Crushed in 2016

Stock Market Crash:If you believe the bull market is still in place despite the hiccups, you may want to read what I have to say…

It looks more and more like we are in a bear market and a pending stock market crash may be in. Small-cap investors already know about a bear market.

At this point, it doesn’t make sense to sugarcoat the stock market activity. If you are expecting stocks to rally and continue higher, you may be in for a rude awakening, as a stock market crash in 2016—or at least a major adjustment—is probably more likely.

The China risk and the uncertainty of oil prices are continuing to drive stock market weakness, as investors hold their collective breathe for the fourth-quarter earnings season.

Are We On the Verge of a Stock Market Crash?

There is minimal confidence in the ability of stocks to hold, as demonstrated by the selling that emerges after rallies. Even as stocks are upgraded, they decline. The failure of the stock market to hold on to gains is a pretty good indication of underlying technical weakness.

Take a look at investor sentiment in the stock market. On the NYSE, investor sentiment has been extremely bearish, with the emergence of a massive number of fresh new 52-week lows each day, scattered with only a few new highs.

Over the past seven sessions to January 14, there were an average of 404 new lows and only 12 new highs on the NYSE.

NYHLR NYSE New High Low INDX Chart 1

Chart courtesy of www.StockCharts.com

The underlying breadth of the stock market is equally bearish in the near-term. We are seeing excessive declining issues versus stocks moving higher.

Yet, while the selling does not at all surprised me, there appears to be extreme selling capitulation with investors randomly running for the exits in fear of losing more. At this point, the selling has been broadly based in the stock market with no place to hide.

On the charts, the NASDAQ Composite, Dow Jones Industrial Average, S&P 500, and Russell 2000 are all in correction territory, below their respective 50- and 200-day moving averages (MAs).

The stock market is trending lower, as the bears take charge. Only about 19% of all U.S.-listed stocks are above their 200-day MA, versus 35% a month earlier. The short-term outlook looks dire, with only about 11% of stocks above their 50-day MA versus 33%.

SPXA50R S and P 500 Percent of Stock Above 50 Day Moving Average Chart 2

Chart courtesy of www.StockCharts.com

The major area of risk continues to be in the small-cap segment. The Russell 2000 is showing a bearish death cross and appears to be in a technical bear market, down 22% from its high in 2015.

RUT Russell 200 Small Cap Index Chart 3

Chart courtesy of www.StockCharts.com

There are some attractive valuations in the small-cap space, but the downside risk remains high for the potential of more losses.

At the end of the day, there is simply no leadership from the technology or the banks, which were largely responsible for the buying momentum in 2015.

In technology, investors are clearly nervous about adding new positions. Even when major stocks are upgraded, investors sell into any rally. This is bearish, but at the same time, it provides good opportunities for those willing to ride out the volatility.

Over the next few days and weeks, watch if oversold buying support emerges.

Here’s My Thinking for This Bear Market

The current stock market is suitable for those with a higher risk appetite; others should step aside and wait it out. I expect the selling into strength to continue in the foreseeable future unless there is some fresh buying catalyst.

Of course, investors should make sure to have some hedges in place, with put options to help guard against further weakness and a stock market crash—especially for buy-and-hold investors.

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