Stock Market Crash: If You Own Stocks, You Have to Read This

Stock Market CrashStock Market Crash Looming in 2016?

My hope for a Santa Claus rally is quickly fading, albeit I also thought it would have been a long shot, as we are witnessing a potential stock market crash or at least an adjustment. I’m not at all surprised, given the narrowness of the stock market advance this year. When only the top quartile or less of stocks are moving higher, you really have to take a step back and believe the stock market crash could happen towards year-end. Now, I may be wrong, but things don’t look great in the final weeks of trading.

The S&P 500 and Dow Jones Industrial Average have weak technical breadth, which means there is a lack of sustained buying from the stock market. This trait is not what you want to see; in reality, it reflects more of a market that may be set for a decline.

I have said on numerous occasions in the past that the six-year-plus bull market is on weak legs, with unsustainable advances followed by market adjustments.

Some are blaming the plummeting oil prices for the current malaise in the stock market. They are correct to some degree, but the fact is that corporate revenues and earnings look tired. This has been the case for the last year and the estimates for 2016 point to potentially more cautious growth and results ahead.

Big Risk in High-Beta Stocks

While the S&P 500 and Dow Jones Industrials managed to avert a negative return this year, my concern lies in the higher-beta-growth and small-cap positions on the stock market. The technical price charts of two of the indexes look horrible at this time and could foreshadow more stock market selling on the horizon.

The way the stock market trades at this time resembles a bear market, when small rallies are followed by selling and lower new 52-week highs are established. More new 52-week lows suggest the stock market is vulnerable to more downside moves.

Let’s take a look at two charts and you’ll understand my thinking here.

The NASDAQ 100 index comprises the 100 biggest technology or growth companies. Here you will find the big-name technology stocks that have largely been responsible for the upward push in this index and the sister NASDAQ Composite. Facebook, Inc. (NYSE:FB), Netflix, Inc. (NASDAQ:NFLX), Alphabet Inc (NASDAQ:GOOG), and, Inc. (NASDAQ:AMZN) are all here.

A look at the chart of the NASDAQ 100 below shows an obvious bearish double-top formation with a declining relative strength index (RSI), which implies a loss of buying momentum. The moving average convergence/divergence (MACD) is also trending downward and flashing a sell signal. A pushback down to 4,500 could see a move to 4,100, representing a more than 10% decline from the current levels.

Nasdaq 100 Index Chart

Chart courtesy of

Now look at the chart of the small-cap Russell 2000, which was down as much as six percent on Friday and off more than 13% from its high.

The Russell 2000 is also exhibiting a bearish double-top formation with a declining RSI and MACD. The index is showing a bearish death cross on the chart, with the 50-day moving average (MA) below the 200-day MA. Failure to hold could see the index test 1,080, which would translate to a 10.35% downside move this year and 16.67% from its peak.

Russell 2000 Small Cap Index Chart

Chart courtesy of

What to Do

The simplest strategy against a stock market crash would be to make sure you hedge the downside risk on the higher-beta stocks in your portfolio. This can be done via put options on such positions as the Powershares QQQ Trust (NASDAQ:QQQ) or the iShares Russell 2000 ETF (NYSE:IWM).

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