Stock Market Crash: This Chart Shows Big Losses Ahead for Equities
Here’s How a Stock Market Crash Could Happen
If you are bullish on equities, it may be time to pause and reflect. We could be headed for a stock market crash.
As dire as it may sound, 2016 could be the year when the stock market sees massive losses—just like 2008 and 2009.
Going forward, remember the most basic principle of technical analysis: the trend is your friend until it’s broken. Sadly, as it stands, key stock indices have broken below the trend that began in 2009.
Please see the chart below of the S&P 500 and pay close attention to the circled area.
The S&P 500 has broken below the trend that began in 2009. As this is happening, we see the volume surging (circled area at the bottom). Saying the least, volume increasing as the long-term trend breaks is something that should be taken very seriously. It says that investors are quickly running for the exits—and they are nervous.
Chart courtesy of www.StockCharts.com
If this wasn’t enough to convince you, then look at how investors’ bets against the stock markets are mounting higher each day.
Take a look at the chart below. It shows the amount of assets in the bearish stock market funds. The higher the assets in the bearish funds, the more pessimistic are investors.
Chart courtesy of www.StockCharts.com
According to the chart above, it’s clear that bearish stock funds have been gaining in popularity since September. In other words, investors are turning more pessimistic. Mind you, assets in these funds are at their highest level since 2012!
I begin with a question: can you point to one thing that has lead to many of the biggest stock market crashes in history? I can—the combination of nervousness, fear, and panic among investors.
With this said, those who follow the stock market on a regular basis know it well. The moves we have seen since the beginning of 2016 are not typical profit-taking moves. They should be taken seriously because they are backed by poor fundamentals and investor nervousness.
Now, if we continue to see more losses, you have to ask what will investors who bought in early 2014 do. In the first few weeks of 2016, stock markets have wiped out all the gains made since late 2014. Will investors hold on to their position or sell? I would not be surprised if they sell and run for the exits.
From there, I wouldn’t be shocked to see panic kick in. You see, all of a sudden, investors will realize that they haven’t made any money and now their wealth is declining. This is where extreme selling could come in play and we could see big losses in a short period.
The big question: how does one protect him or herself from a stock market crash?
Go back to basics: trade management. Cutting losses and taking profits off the table helps, too. At the same time, it builds up your cash position at hand. After the selling is over, investors could find great opportunities that could generate big returns.
