Optimism Foretelling Stock Market Crash
Stock investors beware. Don’t get too complacent with soaring key stock indices. A stock market crash could be looming.
Remember, optimism or outright euphoria is one of the best indicators of a stock market crash. Whenever investors and stock advisors turn optimistic, you might want to pause and reflect a bit.
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Look back at any previous sell-off. Just before it, there was a significant amount of optimism among investors.
As it stands, we are seeing investors and Wall Street analysts turning optimistic like never before. For those looking to protect their assets, it’s important they see what’s happening.
To give you some perspective, consider the American Association of Individual Investors (AAII) Investor Sentiment Survey. It’s a simple survey that asks investors where the stock market will be in the next six months.
In its most recent survey, 78.6% of the respondents were bullish or neutral toward the stock market. Just 21.4% of investors were bearish on stocks. (Source: “AAII Investor Sentiment Survey,” American Association of Individual Investors, accessed January 24, 2018.)
Breaking these numbers down further…
Of all the respondents, 54.1% were bullish on the stock market. AAII says the historical average of bullish investors is around 38.5%.
24.5% of all investors were neutral. The historical average is 31.0%.
For bearish investors, the historical average is around 30.5%.
Notice something interesting? From the historical average, there are way more bullish investors these days. Don’t take this lightly whatsoever.
Look at the Wall Street analysts too.
85% of Wall Street banks expect the S&P 500 to end higher in 2018! (Source: “Will the Stock Market Crash in 2018? Here’s What Wall Street Predicts,” Fortune, December 28, 2017.)
Mind you, optimism is soaring among investors and analysts on the back of extremely high valuations.
Stock Market Outlook; Ruling Out a Crash Could Be a Big Mistake
Dear reader, there’s one thing I have learned over the years: if expectations are very high and if they are not met, the disappointment is immense.
Right now, the expectation is that the stock markets will continue to perform (if not better) like they have been over the past eight years. Fundamentals are thrown out the window and we are starting to hear “this time it’s different.”
If markets don’t perform as expected, investors could panic and sell. Understand that nothing has to go wrong for this to happen. This means the U.S. economy doesn’t have to go into a recession, the earnings growth rate doesn’t have to fall, and the global economy doesn’t need to break down.
Only investor sentiment needs to get a reality check. This could cause investors to panic and run for the exit. In the midst of it all, we could get a stock market crash.
While we are at it, keep this in mind as well: over the last one year and a few months, we have not seen any sort of correction on the markets. There hasn’t even been a time when the S&P 500, for example, dropped more than five percent. You have to question how investors will act if, all of a sudden, the market drops 10%.
Mark my words, a stock market crash could be a likely scenario much sooner than many anticipate. The conditions, as I see it, are ripe for it.
Are markets forming a top?
If someone says they can predict the exact top, run away from them. It’s impossible to predict. But know that we could be nearing one.
In the meantime, capital preservation is key.
