The Last Time This Happened, the Stock Market Crashed 51%

Stock MarketBrace for a Stock Market Crash?

The last time this happened, we saw the stock market crash more than 50%.

This picture tells an important story about the stock market…an ominous technical formation that has industry insiders worried.

And paying attention to it could have a huge impact on your wealth. People who ignored this warning last time saw their net worth cut in half. Let me explain…

Bears aren’t stealthy.

In the wild, a full-grown grizzly weighs more than 500 pounds. These things can’t exactly track through the forest without a whisper. For that reason, there is almost no such thing as a stealth bear attack.

In the wild, bear attacks happen because most people miss the warning signs. The same is true in the stock market. If you were paying attention back in 2000 and 2007, you could have avoided the bear markets of 2000 and 2007.

How do professionals avoid getting mauled? A lot of traders like to use the 50- and 100-week moving averages. It works by collecting an asset’s closing prices from the past 50 and 100 weeks, then taking the average of those prices.

This produces a chart line that “smooths out” market volatility. At a glance, we are able to size up a market trend. By stacking moving averages on top of one another, we can get an idea of where the stock market is going next.

Last week, we saw exactly that. On Friday, the S&P 500’s faster-moving 50-week average crossed above its slower 100-week moving average. Needless to say, this is a big deal. Over the past 20 years, we’ve only seen this signal twice…and each time, it signaled the beginning of a vicious stock market crash.

S&P 500 Large Cap Index

Chart courtesy of www.StockCharts.com

In 2001, just after the tech bust, this indicator flashed a blaring warning signal. Over the following months, the stock market crashed nearly 40%. Savvy investors didn’t miss the entire bear market, but they were able to avoid most of the attack.

The same thing happened again in 2008. The market started to turn south in the spring. Traders watching the warning signs were able to avoid a 51% loss.

Could we see another stock market crash akin to 2000 or 2008?

I’m not inclined to make outlandish predictions based on a single indicator. That said, there are plenty of other signs that make me nervous.

We’re overdue for a downturn. It’s been 2,618 days since the last stock market correction. The market upswing became the second-longest bull market in American history last week, surpassing the streak that spanned 1949 to 1956.

Margin debt increased in March. The amount of money investors have borrowed to buy stocks is approaching a record high. You usually only see this near the top of a market move. (Source: “NYSE Margin Debt Increased In March,” Investing.com, April 29, 2016.)

And as my boss, Michael Lombardi, wrote last week, corporate profits are getting squeezed. Companies in the S&P 500 saw their earnings decline by 7.6% in the first quarter. And with the downturn in the oil patch, this is unlikely to reverse anytime soon.

We’re staring down a 500-pound grizzly and you don’t want to wait around to get mauled.