Stock Market Crash: These Charts Are a Grim Warning for Investors
3 Charts Investors Shouldn’t Overlook
Mainstream stock advisors will never tell you this, but it’s true: the odds of an economic collapse and stock market crash in 2016 are stacking up higher each day.
When I want to know where the stock market is headed, I look at three indicators and they are very powerful predictors over a longer-term period. Those indicators are copper prices, corporate earnings, and how investors treat utilities stocks compared to technology stocks.
Please look at the chart below of copper prices and the S&P 500. At the bottom of the chart, I have plotted the correlation between the two.
Since at least 2013, copper prices and the S&P 500 have had a positive correlation. You see, the stock market is generally considered a good indicator of economic growth/industrial production. And with copper being an industrial metal, the positive correlation between the two makes perfect sense.
Chart courtesy of www.StockCharts.com
Here’s the question: what happens when this correlation goes haywire? Copper and the stock market are moving in opposite directions. Saying the very least, it suggests a stock market crash could come into play.
Consider this: between 1998 and 2002, the correlation between copper prices and the S&P 500 turned negative. In this period, we saw a massive stock market crash.
Moving onto corporate earnings, you should be wary if corporate earnings are declining but the stock market is rising.
As it stands, we are seeing corporate earnings plummet, while the stock market continues to climb higher. This is a deadly combination that could result in massive losses.
Please look at the chart below of corporate earnings of S&P 500 companies and the price of the index. I have also plotted the correlation between the two.
What you see should scare you…
Chart courtesy of www.StockCharts.com
Since mid-2015, corporate earnings and the S&P 500 have been moving in the complete opposite direction. Last time they had a complete negative relationship, it was back in 2009—when the stock market crashed.
Lastly, paying attention to investors’ risk preferences is important, too. It tells if they are scared of owning stocks or if they want to buy. One of the ways I look at this phenomenon is by comparing the performances of utilities stocks (generally considered safe) and technology stocks (considered speculative).
Look at the chart below. In it, I have plotted the performance of utilities stocks and technology stocks. The black line represents the utilities stocks, and the blue line represents the technology stocks.
Chart courtesy of www.StockCharts.com
Saying the very least, the chart above is saying that investors dislike risk—they are piling up “safer” stocks and ditching the “riskier” ones. This could be dangerous for those who are bullish on the stock market.
Stock Market Crash for 2016
Earlier in 2016, we saw massive selling. Key stock indices like the S&P 500 and the Dow Jones Industrial Average plummeted roughly 10% each.
Now, it seems like nothing happened—key stock indices are back to where they started the year and the mainstream tells us that more gains will follow.
You have to be very careful. The three indicators mentioned here aren’t the only ones that suggest a stock market crash is possible in 2016; there are several more that suggest the same.
Dear reader, the last thing you want is to get stuck in a sell-off. Capital preservation, in my opinion, should be an investor’s top most priority.
