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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 option (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.
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Beyond this, understand that business conditions could get much worse in the coming quarters.
