The Last Time This Happened, the Dow Jones Industrial Average Dropped 52%
Crash Coming for Dow Jones Industrial Average?
The Dow Jones Industrial Average is soaring after a rough start to the year. Is it time to buy? Don’t be too quick to judge—risks of a major stock market crash in 2016 still remain.
There are three indicators that every investor should follow very closely. They are screaming that a stock market crash could be ahead and it could happen much sooner than many anticipate.
The first stock market indicator investors should pay attention to is the amount of money being betted against the key stock indices.
Please look at the chart below. We have plotted the Total Assets Rydex Bear Index Funds at the top. This essentially shows the amount of money investors are betting against the stock market. The Dow Jones Industrial Average is at the bottom.
Chart courtesy of www.StockCharts.com
You see, there’s something interesting happening here. Between 2012 and late 2014, bets against the stock market were declining. It made sense because the key stock indices were moving higher. In the beginning of 2015, bets against the stock market started to increase.
What did the stock market do? The Dow Jones Industrial Average has been flat. This essentially means buyers aren’t able to take the stocks higher. I ask, how long can they continue until they turn into sellers? When that happens, we could see a stock market crash.
The second stock market crash indicator investors should look out for is the Money Flow Index (MFI). At the very core, this indicator looks at volume, prices, and relative strength on the stock market. With this said, please take a look at the chart below and pay close attention to the highlighted areas.
Chart courtesy of www.StockCharts.com
Look at the first highlighted area in 2007, to the left of the chart. In later part of the year, the MFI started to drop. In the midst of this, we saw a top develop on the Dow Jones Industrial Average. A few months later, the stock market started to plummet, shedding more than 50% in value.
Now we see the MFI dropping and the stock market is having a very hard time moving higher. The Dow Jones Industrial Average is struggling to cross above 18,000. Could this be a top forming? The better question is this: could this be a setup for a stock market crash that takes the Dow down 50% or more?
Mind you, let me make myself clear: I am not saying markets crashed because the MFI started to move lower, but rather I am saying the MFI is great at predicting stock market crashes.
Last but not least, the third indicator investors should pay attention to is investor sentiment. We look at it through the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), often referred to as the “Fear Index.”
Chart courtesy of www.StockCharts.com
The Fear Index says investors are outright complacent. Their complacency is near the same level as it was back in 2007! Know this: whenever investors are fearless, you have to be careful.
Dow Jones Industrial Average Outlook 2016
Investors have to make every investment with extreme caution. Stock markets have made a solid run to the upside since 2009. The outlook for the rest of 2016 and for the next few years looks bleak.
If you are ruling out a major stock market crash, you could be making a big mistake.
Bulls beware!
