Today I have some scary charts for you, as it looks like the S&P 500, as well as the rest of the equity market, is heading for a drop.
For starters, here is the six-month daily S&P 500 chart:
We had a double bottom in mid-February and launched into a short covering frenzy. This run-up is over.
The market has started to roll over, the uptrend is broken, and the MACD has crossed well above the zero line, which is bearish.
Here is the five-year weekly chart of the S&P 500, just to give us some perspective:
This shows that we are in a bear market. Lower highs and lower lows. Also note the pattern of two double bottoms, a rally, and then a failure.
A worst-case scenario would be a 20% drop (the standard definition of a crash), which would put us back at the 2007 and 2000 peaks of around 1,600. If you’ve lived through market crashes before, you know that when they go, they go fast.
Why would we crash? Well, why not? There has been very little holding this market up with the exception of the Federal Reserve. And it should be noted that the Fed stopped its stimulus program in October of 2014.
Woeful Earnings Forecast:
Earnings expectations are falling at the same time that the market has rallied.
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Small Caps Stink
And if you think the S&P 500 is in for a rude awakening, you should look at the little guys in the Russell 2000.
Check out this chart from the Wall Street Journal that I found via the MishTalk blog:
Click Image to Enlarge
The forward P/E of the Russell 2000 is nil. The WSJ also noted:
The as-reported P/E of the Russell 2000 is negative because of the many ‘1 time’ non-cash charges that must be reported because of GAAP.
I don’t think I’ve ever seen an entire index with a nil price-to-earnings ratio before. You should also note that the S&P 500 P/E ratio is 23.61. That’s not cheap. And that P/E ratio and the dividend yield are expected to be smaller next year.
It’s time to sell equities and buy gold. In Options Trading Pit, we’ve been buying puts.
All the best,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
