This Could Lead to a Stock Market Crash in 2016
Investors are cheering on the stock market after such a strong performance in recent years, but problems are brewing beneath the surface. These three trends should terrify shareholders everywhere and could lead to a stock market crash in 2016.
The S&P 500 and Dow Jones Industrial Average have been more volatile in the last three months than ever this year. Basic technical analysis shows the indices are making lower lows and lower highs, indicating a downtrend has set in. Big corporations are missing out on market estimates and revising their earnings forecasts for future quarters downward. The trend is being witnessed across the board, with giant retailers, too-big-to-fail banks, and worldwide restaurant chains all seeing their stocks dip. One day, markets are up; the next day, they are down. Investors have never been so nervous before.
We at Profit Confidential have been closely following the U.S. and international markets and have forewarned our readers of an impending stock market crash, which we believe will send the economy into another recession, likely much worse than the last one. Here are three more indicators that further reiterate that the recessionary market behavior is already gaining momentum.
1. Weakening Greenback: Gold Up, Dollar Down
The U.S. greenback has always served as a safety reserve for emerging economies that consider it a stable hedge against economic headwinds. That’s not the case anymore! The dollar is taking a hit from waning international confidence in the U.S. debt, as big BRIC economies- China, Russia and Brazil – have all started dumping the U.S. Treasury bonds. (Source: “Once the Biggest Buyer, China Starts Dumping U.S. Government Debt,” The Wall Street Journal, October 7, 2015.)
Not only are big emerging economies pulling down their U.S. currency investments, but they are actually racking up gold, too. Demand for gold is starting to build strength as evidenced by its recent rally, while the demand for the U.S. currency is starting to slide.
Chart courtesy of www.StockCharts.com
Fears of a fourth round of quantitative easing are further fueling skepticism for the currency’s future value. Seemingly, investors have already begun to show more faith in the yellow precious metal over the weakening paper money as a safe haven for their cash. If my memory serves me right, we witnessed the same shift during the 2008 stock market crash, when the dollar significantly lost its value and gold began its best rally.
2. Short Sellers on the Move
The rising short interest ratio is the second most reaffirming indicator of market troubles. During the last financial crisis of 2008, S&P 500 companies suffered massively at the hands of naked short sellers. The market’s short interest was so huge that the Securities & Exchange Commission (SEC) had to halt short selling for a period to stall selling activity in the market and save stock prices from slipping further.
We’re again witnessing a significant hike in short selling. The total short interest for the New York Stock Exchange (NYSE) is currently spiking at more than $18.0 billion. The NYSE short interest ratio, calculated by dividing the total short interest of the NYSE companies by the average trading volume on the exchange, is heading for its five-year high.
3. Stock Buybacks
This year, corporations have engaged in more buybacks than warranted by their earnings. We’re in the third week now, as the S&P 500 companies continue to report their third-quarter earnings, and more than 50% of the S&P 500 companies that have reported so far have missed the market’s earnings estimates.
Many S&P 500 companies have purportedly resorted to debt financing at the current low interest rates to fund their stock buyback programs in an effort to artificially inflate their earnings per share and prop up stock prices. A similar phenomenon was seen back in 2008 when stock buybacks hit their highs just before the recession kicked in.
Here’s the Bottom Line on a Stock Market Crash in 2016
There’s now a growing consensus between analysts and market watchers of another round of quantitative easing. As the speculations surrounding QE4 grow solid, the likelihood of a dollar collapse and a resulting stock market crash grows.
Brace yourselves for more déjà vu moments!