Major Stock Buyers Running Away To Cause Stock Market Crash?
Bulls beware! A stock market crash could occur in the coming months. Don’t pay attention to optimistic stock advisors. Look at the fundamentals. They suggest that a massive sell-off could be ahead.
Let’s get very real here…
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Two of the biggest factors driving the stock market higher after the crash of 2008 and 2009 were low interest rates and the easy monetary policies implemented by the U.S. Federal Reserve.
Now even the Federal Reserve is debating whether to keep interest rates low any longer. This is going to cause a lot of investors to think, and don’t be shocked if they run for the exit. We could see a stock market crash on this alone.
But there’s more.
Understand that for a stock market rally, you need real buyers. Stocks can’t continue to go higher if there are no buyers. It’s that simple. We haven’t had real buyers in a while!
Over the past few years, companies on the key stock indices have gotten very creative. They started buying their own stocks. With this, they were able to make their earnings look better, and give a boost to their stock prices. In fact, not too long ago, companies themselves were the biggest buyers of stocks.
Now the tide is turning, and investors have to be very careful.
Consider this: in the second quarter of 2016, S&P 500 companies purchased $125.0-billion-worth of their own shares. In the previous quarter, this amount was around $160.0 billion. This represents a decline of over 20% quarter-over-quarter, which is the biggest decline since 2011. (Source: “Buyback Quarterly,” FactSet, September 20, 2016.)
Comparing it to the same period a year ago, buybacks declined 6.8%, and they were the smallest buyback amounts since the third quarter of 2013.
The number of companies buying their own shares is declining as well. In the second quarter, it was 350 S&P 500 companies. A year ago, it was 380 companies. This represents a decline of 7.89%. Over the past 12 quarters, the number of S&P 500 companies buying back their own shares amounted to 381 on average.
Here’s what you need to know: since 2005, a majority of the time, whenever share buybacks witnessed big quarter-over-quarter declines, we saw a stock a market crash a few months later. This happened in 2007, 2011, and mid-2015.
Stock Market Outlook: Big Sell-Off Could Be Ahead
Don’t rule out a stock market crash just yet. It could happen sooner than many anticipate. The factors that were driving stocks higher are diminishing very quickly, and this could spook investors.
How much could the stock market crash? You see, from a technical analysis perspective, stocks usually test their previous major levels. For example, the S&P 500 broke above 2007 highs in 2013. It wouldn’t shock me to see it re-test that level again in the case of a panic; a decline of 30% could be possible.
What to do when there’s a stock market crash? Investors should be focused on capital preservation. Remember this: if a stock loses 50% in value during a stock market crash, it will have to increase by 100% for investors to just break even.
