Stock Market Crash to Happen on Back of Bearish Investors
This may be a bold call, but it’s not an out-of-the-world idea: it could be time for investors to prepare themselves for a steep and quick stock market crash.
You see, for a stock market crash to happen, you essentially need two things: investor sentiment turning sour and uncertainty when it comes to business conditions and economic policy. Remember, stock markets are forward-looking animals. Current data rarely matters.
As it stands, we are seeing investor sentiment turning bearish very quickly. This is making a strong case for a stock market crash ahead.
Consider the inflows and outflows from U.S. stock mutual funds and exchange-traded funds (ETFs). In the first three weeks of February alone, mutual funds and ETFs witnessed outflows of more than $49.4 billion. (Source: “Long-Term Mutual Fund and Exchange-Traded Fund (ETF) Flows,” Investment Company Institute, last accessed March 2, 2018.)
If this was the final number for the month of February, it would be the biggest monthly outflows since at least January 2016.
Don’t take this very lightly; it says that investors don’t like stocks, so they are selling.
This isn’t the only indicator suggesting that stock investors are becoming bearish. We see them increasing bets on a stock market crash. Look at the chart below. It shows stocks’ put/call ratio.
Look at the ratio this way: when it increases in value, it means that the prices of put options (bets that stocks will go down) are increasing. That means bears are coming in.
Chart courtesy of StockCharts.com
Looking at the chart above, one could say that, since the beginning of 2018, the price of bets on a stock market crash have increased by over 22%. It also says that bears are busy building up their positions.
New U.S. Tariffs Could Send Stocks Tumbling Lower
Beyond this, understand that business conditions could get much worse in the coming quarters.
Just recently, President Donald Trump came up with an idea (and he is very serious about implementing it) of imposing a 25% tariff on steel imports and a 10% tariff on aluminum imports. Why? To boost the industrial sector of the United States. (Source: “Trump says US will impose steel and aluminum tariffs,” CNN, March 1, 2018.)
While this idea may sound great, and it could help steel and aluminum producers in the U.S., the tariffs could have much bigger implications. This could be the beginning of trade wars in the global economy. Understand that trade wars are not the best thing for businesses. Certainly, some industries benefit, but the overall benefit to the economy disappears in the long term.
Mind you, this is not the first time that the U.S. has talked about imposing tariffs. If you look back, there have been times when tariffs were placed on products like steel, but the retaliation from other countries was not good.
And it all had negative impacts on the stock market.
Why Could There Be a Steep and Quick Stock Market Crash?
Dear reader, don’t forget, stock valuations are extremely high. I have harped on this over and over in these pages.
We have the Federal Reserve implementing higher interest rates and now we could be headed toward a global trade war.
On top of all this, investors have accumulated a lot of wealth since the market bottom in 2009. So, they could be looking to take some profits off the table.
All of this combined could be bad news for stocks. We could see investors running for the exit and, in the midst, we could have a stock market crash in which key stock indices like the S&P 500 drop 20% or more in a very short period.