Brace for a Stock Market Crash?
Two ominous death crosses are warning of a potential stock market crash in 2016, one that could see the markets experience a 10% correction or more.
And that might just be the beginning.
A death cross has formed on both the S&P 500 and the HYG, the exchange-traded fund (ETF) that tracks high yields. Thanks to weak fundamentals and bearish technicals, they’re forming for good reasons. However, there are a number of ways you can play the death crosses to your advantage.
Death Cross 101
For starters, a death cross is a bearish technical indicator that occurs when the 50-day (short-term) moving average of a stock or index crosses below the 100- or 200-day (long-term) moving average.
The good twin to the evil death cross is the golden cross. A golden cross is a bullish indicator that occurs when the short-term moving average crosses over a long-term moving average to the upside.
Before a death cross occurs, the long-term moving average acts like a support level for the short-term moving average. Once the death cross has occurred, the long-term moving average becomes a resistance level.
Both crossovers are considered more poignant if they’re accompanied by high trading volume—now that we are not seeing. Instead, investors have taken a more passive approach on the heels of weak first-quarter results, the abysmal global economy, and fears the Fed will hike rates again when it next meets in June.
Death Cross #1: S&P 500
The S&P 500 formed a death cross recently when its 50-day moving average broke below its 100-day moving average.
This is a big deal for a couple of reasons.
First, the S&P 500 is based on the market cap of 500 of the largest companies listed on the NYSE and NASDAQ. It is easily the most followed index in the world. As a barometer of the U.S. economy, the forming of a death cross does not exactly suggest the U.S. economy is on stable footing.
Second, it’s only happened twice since the dawn of the new millennium, in 2001 and 2008. That’s right, the first one occurred in 2001, just before the tech bubble burst and was followed by a 37% drop. The second death cross took place in 2008, right before the stock markets crashed 48%.
Death Cross #2: HGY
The iShares iBoxx $ High Yield Corporate Bond (ETF) (NYSEARCA:HYG) also just formed a death cross. Why does this matter? HGY is an ETF that tracks high yields. It’s a momentum indicator and a death cross suggests things are moving lower. Many investors see the high-yield market as a leading indicator to where stocks are heading.
Like the S&P 500’s death cross, HGY’s death cross has been an accurate technical indicator of the shape of things to come in the past.
No, correlation is not causation and history does not always repeat itself. As well, not all death crosses are created equal. However, there are enough indicators to suggest this is more than just an inconsequential, circumstantial coincidence.
First-quarter results were bad. The earnings recession is now in its fourth quarter—and soon to be in its fifth quarter. First-quarter gross domestic product (GDP) was terrible. U.S. jobs growth is moribund. U.S. jobless data isn’t exactly stellar. Consumer confidence and, not surprisingly, consumer spending is down.
What else…? Personal debt levels are way up and savings are way down. The global economy is also bad (China, Japan, Brazil, Canada, the eurozone, etc.). Toss in some geopolitical tensions and our own election and you’ve got a lot of sustainable uncertainty.
Investors have good reason to be nervous and should, at the very least, consider what these two death crosses are a result of.
Best Ways to Play the Stock Market Crash
There are a number of ways to play a stock market crash. Here are two really great ways to play the death crosses.
I’m not a precious metals bull, but I do think investors should follow opportunities. In this market, precious metals like silver and gold are a great short-term option.
While silver is up almost 20% since January after four years of declines, it is still near multiyear lows and presents investors with great opportunities for growth.
Plus, silver has a negative relationship with interest rates and there are growing fears that the Federal Reserve will raise rates for only the second time in the last decade in June. If it does, silver prices will take a short-term hit. But, chances are good the Fed will leave rates alone until after the U.S. election—that means well into 2017.
Like interest rates, silver has an inverse relationship with the U.S. dollar. The U.S. dollar has rebounded of late, but it’s still been underperforming in 2016. A strong dollar suggests the U.S. economy is doing well. As a result, investors have no reason to seek shelter in precious metals like gold and silver. However, the fact remains that the U.S. economy isn’t doing well and the greenback will continue to struggle.
Third, the global economy remains severely muted, which is another plus for silver prices.
The silver bull market remains intact. And there will continue to be opportunity for investors to profit from silver’s short- and long-term term growth potential.
Inverse ETFs are a great way to short the market.
The ProShares UltraShort Dow30 (ETF) (NYSEARCA:DXD) seeks results that correspond to two-times the inverse (-2X) of the daily performance of the Dow Jones Industrial Average, while the ProShares Short S&P500 (ETF) (NYSEARCA:SH) seeks a return that corresponds to the inverse (-1X) of the daily performance of the S&P 500.
You can also look beyond our shores. The Direxion Daily China Bear 3x Shares ETF (NYSEARCA:YANG) seeks daily investment results of 300% of the inverse of the performance of the BNY China Select ADR Index; the iShares MSCI Brazil Index ETF (NYSEARCA:EWZ) seeks to track the investment results of an index composed of Brazilian equities; and the ProShares UltraShort MSCI Japan (ETF) (NYSEARCA:EWV) seeks results that correspond to two times the inverse (-2X) of the daily performance of the MSCI Japan Index.
Could This Signal a Stock Market Crash in 2016?
Death crosses don’t just form because a black cat crossed paths with Warren Buffett. Indexes and stocks form death crosses because investors are responding to negative economic factors. Right now, there’s no reason for the negative sentiment to go away. In fact, it looks as though things are going to get a lot worse before they get better.
Batten down the hatches; the numbers say we’re heading for a stock market crash in 2016.