Three Charts That Predicts That A Stock Market Crash Is Possible In 2017

by Umar Farooq
 
It may seem irrational to think this in times when key stock indices are surging, but indicators are flashing red signals. Mark Twain said it best, “When you find yourself on the side of the majority, it is time to pause and reflect.” the amount of optimism toward the stock market is severe. This shouldn’t be ignored. If there’s one thing that previous stock market crashes have taught us, it’s that optimism leads to market tops, and eventually broad market sell-offs.
 
Chart 1:
 
Look at the chart below of the National Association of Active Investment Managers’ exposure index. At its very core, this chart shows the percentage of investment portfolios of active managers that are in stocks (as opposed to other types of investments). For example, the index standing at 60 would mean that 60% of a portfolio is exposed to stocks. Currently, active managers’ portfolios consist of 95% stocks. In December 2016, it was little over 100%, meaning they were leveraged on stocks. This is indicating that institutional investors are bullish on stocks.
 

Chart courtesy of StockCharts.com
Source: lombardiletter.com
 
Chart 2:
 
The chart below plots the results of the Wall Street Sentiment Survey—opinions of experienced traders about the direction of the market—done weekly. At the bottom of the chart, the S&P 500 is plotted. Over the last three years, whenever the number of bullish traders hits 70% or above, we see a sort of stock market crash follow (look at the bolded rectangular areas in the above chart). The most recent example of this was in late 2015 and early 2016.
 
Not too long ago, we saw over 70% of traders turn bullish. Will a stock market crash follow?

Chart courtesy of StockCharts.com
Source: lombardiletter.com
 
Chart 3:
 
Here’s another chart below that suggests a stock market crash is looming.

Chart courtesy of StockCharts.com
Source: lombardiletter.com
 
This chart essentially shows how many assets there are in funds that are betting on a stock market crash. This chart shows that funds that bet against the stock market have the lowest assets in more than 17 years!
 
On Tuesday, the Dow, the S&P 500, and the Nasdaq all set brand new record highs once again. Overall, U.S. stocks are now up more than 10 percent since the election, and this is probably the greatest post-election stock market rally in our entire history.
 
But stocks were already tremendously overvalued before the election, and at this point, stock prices have reached a level of ridiculousness only matched a couple of times before in the past 100 years. Only the most extreme optimists will try to tell you that stock prices can stay this disconnected from economic reality indefinitely.
 
We are in the midst of one of the most outrageous stock market bubbles of all time, and as MarketWatch has noted, all stock market bubbles eventually burst: “The U.S. stock market at this level reflects a combination of great demand, great complacency, and great greed. Stocks are clearly in a bubble, and like all bubbles, this one is about to burst.”