You Know The Crash Is Coming, Right?
The S&P 500/SPX (SP500), Nasdaq, as well as other major market averages and ETFs continue to hit new all time highs/ATHs, after new ATH essentially on a daily basis.
Despite an exploding number of COVID-19 cases, continued civil unrest, uncertainty about the November Presidential election, as well as other detrimental factors, SPX futures continue to move relentlessly higher at an extremely rapid pace. SPX futures are now at around 3,550, which is roughly 5% above pre-COVID-19 ATHs. Moreover, SPX futures are now about 60% above their mid-March lows, which are astounding gains in fewer than a 6-month period. This makes me think, how much longer can this rally last without a significant correction?
Since I am writing this article in pre-market Wednesday September second, the nearly 1% gain in SPX futures is not factored into this chart. Nevertheless, just look at some of these technical indicators. The RSI is at round 79, but once the market opens it should surge to over 80. This implies that the SPX and stocks in general are drastically overbought right now.
When have we seen the RSI at similar levels? That’s right, shortly before the market crashed in early 2020. Other “troubling” technical indicators like the CCI sloping downward, the full stochastic being above 80 for a very extended period of time, and volume decreasing lately are also flashing red signals.
Overall, there are a lot of yellow, and even red flags on the technical front. Furthermore, cracks are materializing in the fundamental image as well. Now, this does not mean that the market is going to crash today, tomorrow, or even a week from now. In fact, I believe that despite all the “madness”, irrational exuberance may continue to propel this rally for several more weeks, possibly to mid-fall even. But then, the crash will come in my view, and it could get grizzly.
The stock market surged remarkably fast to new ATHs despite a faltering and/or stagnating economy. Many if not most investors did not expect the SPX to surge by over 60% in fewer than 6 months, and it is very likely that many investors are not prepared for the swift and violent market downturn that is likely to occur in early to mid-fall in my view.
Now, Let’s Talk About The Nasdaq for a Minute
If you think the SPX is running hot, just look at the Nasdaq:
We see a somewhat similar technical image as in the SPX. The RSI is approaching 80, volume is declining, the CCI and full stochastic are starting to look negative, etc. Once again, since I am writing this article in the pre-market the Nasdaq futures’ roughly 1% gain is not factored into the underlying chart.
So, let us look at Nasdaq futuresNasdaq futures are at around 12,500 now, which is about an 11% gain over the last 9 trading sessions alone. This is quite remarkable indeed, but if we look back a bit we see that Nasdaq futures are now around 28% above their pre-COVID-19 ATHs, and have skyrocketed by a remarkable 87% since their mid-March bottom. That’s nearly a double in under 6 months. However, I would not be surprised if the Nasdaq continues its run based on hype, hope, and QE unlimited until it is up by around 100% from its lows, before the Nasdaq and stocks in general begin to crumble again.
A Few “Interesting Facts”
Tesla (TSLA) now has a market cap of nearly $450 billion, and if we took away its recent 5-1 stock split, shares would be worth close to $2,500. I’ve been a Tesla bull for years, and I expect it to become a trillion dollar company eventually, but I did not expect the rise to nearly half a trillion to be this rapid.
In fact, I believe the company’s valuation is unjustified and unreasonable at this point, is largely driven by short covering and FOMO, mostly from the retail investor side. This will likely end badly in the near future (meaning Tesla could decline by 25-50% in the upcoming crash in my view).
I remember not so long ago market participants were saying “wow, how can Tesla be worth more than Ford (F), then General Motors (GM)”. Well, now Tesla’s market cap is more than Toyota (TM), Volkswagen (OTCPK:VWAGY), Honda (HMC), Ford, General Motors, and a few other auto makers combined.
Apple (AAPL) is now worth more than the entire FTSE 100, which are essentially the 100 biggest companies in Great Britain. Apple’s market cap is now around $2.3 trillion, and the company is trading about 36 times next year’s consensus EPS estimates, making it extremely frothy in my view.
Is Apple a growth company all of a sudden? I think not (at least not for long), as it is largely a cyclical hardware manufacturer for the most part (aside from its services business) and its projected revenue growth for this year is only around 5%. Next year’s 12.5% consensus estimates cannot be trusted in my view as it is unclear whether the “recovery” will be as robust as many market participants envision.
The Retail Investor
Typically, retail investors pile into stocks towards the top in the market and this is what we are seeing right now. In fact, we appear to be seeing the “smart money” preparing for a crash, but the retail guys, not so much. Retail investors seem to be buying stocks hand over fist on apps like Robinhood (which is under SEC investigation), and others. Moreover, the buyers seem oblivious to valuations and economic cracks forming beneath the surface of the U.S. economy and other major economies around the globe.
The VIX Divergence
The VIX, or the volatility/fear index is creeping higher despite the SPX hitting new ATHs day after day. Such a divergence is rare and typically occurs before a market meltdown, as option traders load up on put options for protection/or just to short the market. I believe this is a major red flag that implies the smart money is expecting a market crash of roughly 20% sometime this fall.
The Bottom Line
There are simply too many red flags to ignore at this point. Markets have come too far too fast, and it is only a matter of time until the next correction, or meltdown begins.
How much time? I believe we may go through a mild pullback or a consolidation phase in the very near future, possibly just days away. However, the real crash will likely come in late September/early October. Uncertainty about the Presidential election, a possible second wave of the coronavirus, a slower than expected recovery, worsening corporate profits, extremely overbought market conditions, very frothy valuations, and other detrimental factors could cause the current rally to do a rapid 180. This could result in “corrections” of 20% or more in the SPX, Nasdaq, and other major indexes in my view.
Remember, a wise man once said, “be cautious or even fearful when everyone seems greedy, and be greedy when everyone is fearful” – Warren Buffett. I believe this is a very appropriate time to be extremely cautious, and you will very likely get the chance to be greedy when most are panic selling and fearful in the fall, leading up to the Presidential election.
All the best to everyone and have a great day!
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article expresses solely my opinions, is produced for informational purposes only and is not a recommendation to buy or sell any securities. Please always conduct your own research before making any investment decisions.