Soaring Optimism to Cause Stock Market Crash
It’s definitely not talked about in the mainstream media, but a stock market crash remains a possibility for 2017. It may seem irrational to think this in times when key stock indices are surging, but indicators are flashing red signals.
Mark Twain said it best, “When you find yourself on the side of the majority, it is time to pause and reflect.”
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You see, as it stands, the amount of optimism toward the stock market is severe. This shouldn’t be ignored. If there’s one thing that previous stock market crashes have taught us, it’s that optimism leads to market tops, and eventually broad market sell-offs.
Don’t think there’s optimism right now?
Look at the chart below of the National Association of Active Investment Managers’ exposure index. At its very core, this chart shows the percentage of investment portfolios of active managers that are in stocks (as opposed to other types of investments). For example, the index standing at 60 would mean that 60% of a portfolio is exposed to stocks.
Chart courtesy of StockCharts.com
Currently, active managers’ portfolios consist of 95% stocks. In December 2016, it was little over 100%, meaning they were leveraged on stocks. This is screaming that institutional investors are bullish on stocks.
Beware.
But this isn’t all. Look at another chart below. It plots the results of the Wall Street Sentiment Survey—opinions of experienced traders about the direction of the market—done weekly. At the bottom of the chart, I have plotted the S&P 500.
Chart courtesy of StockCharts.com
Over the last three years, whenever the number of bullish traders hits 70% or above, we see a sort of stock market crash follow (look at the bolded rectangular areas in the above chart). The most recent example of this was in late 2015 and early 2016.
Not too long ago, we saw over 70% of traders turn bullish. Will a stock market crash follow?
Here’s another chart below that suggests a stock market crash is looming.
Chart courtesy of StockCharts.com
This chart essentially shows how many assets there are in funds that are betting on a stock market crash. This chart shows that funds that bet against the stock market have the lowest assets in more than 17 years!
Stock Market Outlook Says Major Losses Could Be Ahead
It can’t be stressed enough: optimism about the stock market shouldn’t be taken lightly. If you look at the greatest investors, like Warren Buffett, they have made it very clear that in times of severe optimism, be nervous.
With this said, is the stock market top in place, and are we about to see the stock market crash soon?
Dear reader, remember that predicting tops is deadly. We won’t know until a top is actually in place. But, if optimism is any indicator, we could be closing in on it soon.
How rigorous could the losses be if a stock market crash actually occurs? You see, usually in sell-offs, markets tend to check major support levels. For the S&P 500, the next big support level isn’t until the 1,850 area. That’s roughly 21% below where it currently sits.
