Daily Gains Letter

Next Stock Market Crash Coming Soon?

By for Daily Gains Letter |

Stock Market CrashA look at the charts makes me a bit nervous that the next stock market crash could be on the horizon. The fact is that the market has not witnessed a correction of any major proportions in excess of 10% since the stock market began to turn up in March 2009.

Sure, we have had the occasional five-percent adjustments in stocks, but these periods of selling were short-lived, always followed by periods of buying support. I suspect we could be on the verge of another correction that could drive the major stock indices down to test their respective 200-day moving averages (MAs) after already breaching the key short-term 50-day MA.

While we would all love to see stocks continue to creep to new record highs, this is not healthy for the overall bull market, which may or may not be sustainable.

Let’s be clear; I think a stock market crash like we witnessed in 1987 and 2000 is unlikely. The current valuations may be somewhat stretched but not enough, in my view, to cause a chaotic episode in stocks.

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

It’s true that corporate America is struggling to generate any revenue growth. And earnings continue to be driven by cost cuts. But we’re still seeing some bright spots like jobs and confidence.

What Could Drive the Next Stock Market Crash?

The current selling spree could pick up some steam and drive selling capitulation.

There’s anxiety regarding the current selling in global bonds that is triggering a rise in bond yields, which we all know is negative for the stock market.

The recent rally in oil prices to above $60.00 a barrel also isn’t helping. Still, I can’t believe prices will continue to head higher. The oversupply and excess inventory of oil continues. OPEC is not cutting production. In my view, the rally has been driven by the major cut in oil rigs as the imbalance between supply and demand continues.

And then you have the Fed. Chair Janet Yellen recently suggested the equities market valuations were high, which of course drove sellers to the exits. It’s really the first time the Fed has commented on stock market valuations in quite some time. This reminds me of the days of former Chair Alan Greenspan, who used to rock the stock market with his comments.

Across the Pacific Ocean, we are seeing bubble-like conditions in the Chinese stocks that could realistically cause a crash there. The Shanghai Composite has doubled over the last year. The move to establish the Shanghai Hong-Kong Stock Connect has made it much easier to invest directly in Chinese stocks through Hong Kong rather than indirectly through American Depositary Receipts.

What Investors Should Do to Protect Themselves

Other than not chasing stocks on rallies, you should always adapt a strategy to absorb some profits after rallies and thus lighten your positions.

You can also set up protective hedges through the addition of put options on stocks and indices.

If you are a long-term investor, consider writing covered calls on some of your stocks in order to generate some premium income and reduce your average cost base.

The key in all of this is to think defensively!

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