Money Managers Could Be Expecting a Stock Market Crash
The odds of a stock market crash continue to stack higher. Stock investors beware, because major losses could be ahead. Capital preservation could be very important in the next few months.
There’s a lot of evidence that investor sentiment is changing. This is not good, and it foretells a stock market crash.
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Consider the chart below as one example. It shows the National Association of Active Investment Managers (NAAIM) Exposure Index. At its core, this index shows what percentage of active managers’ portfolios consists of stocks.
As it stands, just about half of active managers’ portfolios are stocks. Go back to the end of 2017 and this percentage was over 100%. That means investors were borrowing to buy stocks.
Chart courtesy of StockCharts.com
For a major part of 2016–2017, active managers’ portfolios were almost entirely stocks.
Don’t take this lightly. The chart above is suggesting that money managers are turning sour on stocks, and they may not be too optimistic going forward. By looking at the pace of the reduction in stock exposure, one could even say that the managers are anticipating a stock market crash.
Mutual Funds and ETFs Witness Massive Outflows
But don’t just look at the exposure index. Look at the U.S. stock mutual funds, and exchange-traded fund (ETF) inflows and outflows as well. They indicate that investors could be running for the exit.
According to the weekly data from the Investment Company Institute (ICI), between early February and the third week of March, investors withdrew $52.0 billion from long-term U.S. stock mutual funds and ETFs. (Source: “ Long-Term Mutual Fund and Exchange-Traded Fund (ETF) Flows,” Investment Company Institute, last accessed April 2, 2018.)
We don’t have the monthly data yet, but the weekly data shows that investors withdrew the greatest amount of money from U.S. long-term stock mutual funds and ETFs since at least January 2016.
“Buying The Dip” Isn’t Working Anymore
Beyond all this, just look at the price action on the key stock indices. It tells us that investors aren’t the biggest fans of stocks these days.
If you recall, over the past few years, one phenomenon prevailed: whenever stocks dipped, investors rushed to buy. This is not happening anymore. Look at the chart of the S&P 500 below:
Chart courtesy of StockCharts.com
Notice something interesting? Until late January, if you bought stocks on dips, you made money a few days later. But this is not the case anymore; a dip now is now being followed by a sell-off. This implies that sentiment is changing.
Also notice the red line on the chart above, which is the 200-day moving average of the S&P 500. The index just broke below it. We haven’t seen something like this happen since early 2016. It suggests that the long-term trend on the S&P 500 is broken.
What Could Be Ahead?
Dear reader, it can’t be stressed enough: the markets are setting up to disappoint.
Don’t be shocked if 2018 is the year when the stock market crash happens. Key stock indices like the S&P 500 and the Dow Jones Industrial Average are already down over 10% from their recent highs, and they could go much lower.
With all this said, it may be time for stock investors to look over their portfolios. I reiterate what I said earlier: capital preservation could be very important in the next few months.
