Stock Market Crash Coming? How to Get Ready for It
Folks, you need to be careful out there—especially if you trade solely on the long side—as we could be at risk for an upcoming stock market crash…or at least a correction.
Looking at the bull market, it is clearly tired after moving up unabated since March 2009. Despite multiple record moves by the major stock market indices, including the NASDAQ, we are simply not seeing any sector leadership at this time from the technology or financial segments.
The stock market appears to be on shakier ground now than in 2014. So, look to protect your portfolio using put options on major stock positions or on the numerous indices.
More Correction to Come?
On the charts, the NASDAQ joined the S&P 500 and Dow in breaking below its 50-day moving average (MA) on Monday, June 15. The S&P 500 and Dow are holding on to a tiny gain this year at just above break-even. To make matters worse, the Dow could be set for a challenge at its 200-day MA at 17,629.
Yet despite the current selling, we could see more to come. For instance, the Dow has only corrected 3.38% from its high, while the S&P 500 has retrenched 2.8% as of Monday morning.
Chart courtesy of www.StockCharts.com
If you look at the past six years of the bull market, you can see we witnessed corrections mainly in the five percent range, going as high as seven percent. We could see more downside moves; so be careful and stay on the sidelines if you want to err more on the conservative side.
As I said, the lack of leadership is an issue. Unlike the past years when technology provided strong upside moves, many of the momentum stocks have stalled.
The inability to reach and break higher with bigger volume is a negative divergence for technicians. It shows the record moves were associated with light volume and doesn’t point to wider mass-market interest. Again, a red flag.
Also Read: Stock Market Crash in 2015 is Coming, Despite Widespread Bullishness
Why There Could Be an Upcoming Stock Market Crash
At the core of the issue, the current stand-off in Greece is casting a dark cloud over stock markets around the world; from Asia, to Europe, to the United States.
It’s amazing how Greece, with the 43rd-largest economy in the world, has essentially sliced off hundreds of billions of dollars from the global stock markets. Of course, the fear is that failure to attract additional funding from the International Monetary Fund (IMF) and its other lenders could force Greece into bankruptcy and an exit from the eurozone.
The fear is that while Greece is only the 13th-largest economy in the European Union, the debt problems there could in turn remind investors that there’s also Portugal, Italy, and Ireland to consider.
Spain, the fifth member of this illustrious group known as the PIIGS, appears to be turning things around. But don’t tell that to the unemployed in the country that stand at around 25% of the population.
Given the situation and obvious stalling, I would be looking at making sure protective hedges are in place through the use of put options. You may also want to lighten your load on some of your bigger winners and wait for potential weakness to re-enter. The key now is capital preservation.
Also Read: These Economic Indicators Point to a Possible Stock Market Crash in 2016
