Major Wall Street Survey and Indicator Suggests Stock Market Crash Could Be Ahead
Truth be told, the risks of a stock market crash are increasing day by day. Beware: big losses could be ahead.
Even Wall Street is starting to resonate with this opinion.
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For instance, in the latest Bank of America Merrill Lynch fund manager survey, 34% of those who responded to the survey think stocks are overvalued. Note that this was the highest percentage of fund managers saying this in 17 years. (Source: “A record number of investors think this market is overvalued,” CNBC, March 21, 2017.)
When it comes to regional valuation, 81% of the respondents said that the U.S. was the most overvalued area when compared to other parts of the world.
This isn’t all.
Also Read: Stock Market Crash 2017? This Could Trigger a Stock Market Collapse
Look at the chart below of the National Association of Active Investment Managers’ Exposure index. At its very core, this index shows what percentage of the active managers’ portfolio is consisted of stocks.
In the past few weeks alone, active money managers have reduced their exposure by a little over 30%. In late February, they had over 100% in stocks (meaning they were borrowing to buy stocks). Now their portfolio consists of of 69% stocks.
Here’s what this chart is telling me: active managers are worried. They are taking profits and anticipating some sort of stock market crash.
Chart courtesy of StockCharts.com
5 Things to Remember During a Stock Market Crash
Dear reader, it’s important to understand what happens in case there’s a stock market crash. When investors are running for the exits, key stock indices tend to test their previous major support levels.
Credits: Flickr.com/AhmadArdity
Looking at the S&P 500, for example, and assuming there’s a stock market crash, know that there isn’t major support until the 1,900 level. Currently, the S&P 500 sits at 2,350. If we assume that a stock market crash takes the index to 1,900, this would mean a loss of 19.1%.
Here are five things investors need to keep in mind in case there’s a stock market crash:
- Always have stops in place. By doing this, investors don’t give away a lot of gains, or they minimize their losses in case of a broad market sell-off.
- When there’s a stock market crash, investors tend to ditch companies with solid fundamentals. So it might be a good idea to be looking for opportunities when other investors are panicking.
- Continuing with the previous point, always have some cash on hand in case there are solid companies on sale. Investors could use their cash to acquire those stocks at attractive prices.
- Investors Psychology 101: sell before the losses get too big. Understand this: if a stock drops by 50%, it will have to increase by 100% for investors to break even. From experience, we know that 100% moves don’t happen very often in the short term.
- Also know that there are ways to make money during a stock market crash. Thanks to financial innovation, investors could look at exchange traded funds (ETFs) like the ProShares Short S&P500 (NYSEARCA:SH). This ETF increases in value as the S&P 500 declines.
