Warning: These Charts Show We’re on the Verge of a Stock Market Crash

Businessman Stock Market Crisis Crash Finance ConceptHere’s Why the Stock Market Could Crash in 2016

Note to all bullish stock investors: the odds of a stock market crash are increasing each day. Your portfolio could be badly hurt if you are not careful.

You must understand this: the fundamentals are against any stock market rally.

Let me explain…

As it stands, corporate earnings are collapsing. Know that when earnings collapse, the stock market crashes.

As of February 19, we have heard from 87% of the S&P 500 companies about their fourth-quarter 2015 earnings. The results are something that should keep bulls up at night. S&P 500 blended earnings declined 3.6% in the fourth quarter. Don’t forget that earnings declined in the second and third quarters of 2015, as well. (Source: “Earnings Insight,” FactSet, February 19, 2016.)

Earnings are expected to continue to decline as we move forward, as well.

In the first quarter of 2016, corporate earnings of the S&P 500 companies are expected to decline 6.5%! Mind you, these are early estimates. Don’t be shocked to hear if this figure is later revised lower.

If you don’t believe the stock market crashes as earnings tumble, then look at the chart below. It shows the S&P 500 quarterly earnings (red line) and the S&P 500 index (green line) over the last 20 years. Pay close attention to the circled area.

 gaapspx spx earnings chart 1Chart courtesy of www.StockCharts.com

It’s very clear that whenever earnings declined, a stock market crash occurred. This happened in 2000, and 2008. If you go back even further on the chart, we see this pattern repeating over and over again.

This time around, I don’t expect anything different.

Without a surprise, investors are catching up to this. Please look at the chart below. It shows the assets in bearish stock funds.

asetbeari total assets rydex bear index funds chart 2

Chart courtesy of www.StockCharts.com

Bearish funds’ assets stand at the highest level they’ve seen since 2011. Since June of last year, these funds’ assets have increased by well over 200%! This is something that shouldn’t be ignored.

At the very core, it offers insight into investor sentiment. It appears as though investors are turning against the stock market very quickly.

How Big Could the Stock Market Crash Be?

We have to go back a little to answer this question.

You see, after the stock markets bottomed in 2009, we saw bullish sentiment toward the market build up. In 2013 and 2014, investor optimism soared. The investment strategy was simple: just buy stocks and don’t look at anything else.

Investors entered 2015 with a very similar sentiment, but later found the strategy they were following for five years didn’t work anymore.

Let’s be very honest: So far, 2016 hasn’t been good for the bulls. Key stock indices like the S&P 500 are down more than five percent year-to-date. If you look at other indices, they are down by much more. The investment strategy popular among investors of “buy stocks and nothing else” isn’t working in the current market.

As this continues, I won’t be surprised to see investors completely lose hope. That’s when they are going to sell and run for the exits in droves.

For now, I’m sitting back and watching all these developments closely. I continue to believe the best investment strategy is capital preservation.