Stock Market Crash: These Charts Reveal a Dire Warning for Investors
Here’s Why a Stock Market Crash Is Possible
Could we see a stock market crash in 2016? This is one of the most frequent questions being asked by investors these days. Major stock indices are down big-time and there’s too much uncertainty around them.
Saying it in simple words, yes, a stock market crash in 2016 is possible and there are three reasons why this could happen: fear among investors increasing, key trends breaking, and bearish funds becoming popular.
To gauge fear in the stock market, just look at the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), also called the “fear index,” and notice the increase since early December.
In the past roughly seven weeks, the VIX has jumped about 100%. Last time the fear index jumped 100%+ within a seven-week period was back in August of 2015. We saw massive selling then. Before that, the VIX jumped over 100% back in 2011. At the very core, this is screaming “investors are nervous” and they’re starting to price in a stock market crash.
Chart courtesy of www.StockCharts.com
Remember this: fear is usually one of the biggest contributors to a stock market crash. When investors are scared, they sell and stay on sidelines until an opportunity arises.
Also, have you paid attention to the long-term charts of key stock indices lately? See the chart below of the S&P 500.
Chart courtesy of www.StockCharts.com
When it comes to technical analysis, there’s one rule that should be remembered: the trend is your friend until it’s broken. You see, the rally that began in the stock market in 2009 had a solid run-up. And, key stock indices like the S&P 500 followed a consistent trend.
That trend, is now broken. What’s also interesting to note here is that as the S&P 500 broke below its long-term trend, we saw volume increase (red circle at the bottom of the chart above). This suggests that there could be much more downside on the stock market.
Finally, one of the biggest reasons the stock market could see a crash is that a lot of money is going into funds that are bearish toward the stock market. Look at the chart below of Total Assets Rydex Bear Index Funds. At the very core, this index tries to tell the popularity of funds that are bearish toward the stock market. From what we know, whenever the stock market is ready for a move to the downside, this index sees a spike.
Chart courtesy of www.StockCharts.com
Since around mid-2015, we have seen a continuous flow of funds into bearish funds. It’s the first time since 2009 that something like this has happened. This is a big sign of a stock market crash ahead.
What to Do When Stocks Are Falling?
Keeping all this in mind, I won’t be shocked if 2016 is the first year since 2008 when the stock market reports massive losses. The three factors we have mentioned above are classic signals. Time will tell more.
Dear reader, know that once the panic strikes, losses mount very quickly. Preserving capital is key to surviving the coming stock market crash.
