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Why We Could Be on the Verge of a Major Selloff

Wednesday, February 22, 2017 17:29
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by Justin Spittler, Casey Research:

It’s a seller’s market.

You might think that’s a misprint. After all, the Dow Jones Industrial Average just topped 20,000 for the first time ever. The S&P 500 and Nasdaq are at record highs, too.

In short, greed is in the air. And that’s exactly why you should be nervous about U.S. stocks.

But don’t take our word for it. Take it from Warren Buffett, arguably the best investor of all time:

Be fearful when others are greedy and greedy when others are fearful.

Today, we’re going to show you just how greedy investors have become. As you’ll see, now might be the perfect time to step aside and wait for the next big buying opportunity.

• The U.S. stock market has been abnormally calm…

As of today, the S&P 500 has gone 50 days without a 1% move. That’s the longest stretch without a big move since 1970.

But that’s not all.

The S&P 500 hasn’t had a 1% drop since October 11. That’s 90 trading days without a big decline—the longest streak without a 1% decline since 2006.

This is a serious red flag.

• You see, volatility is normal…

During bull markets, stocks should have the occasional down day. This allows the market to catch its breath before heading higher.

This hasn’t happened in months.

But U.S. stocks have basically gone up for the last four straight months.

This isn’t just abnormal. It’s unhealthy.

• Think of volatility as the market’s energy level…

When volatility is high, the market is using a lot of energy. When volatility’s low, the market is storing energy.

Because stocks have been so calm, the market’s barely used any energy.

Instead, it’s been stockpiling energy for its next big move. Volatility has now been suppressed for so long, it’s like lightning trying to get out of a bottle.

Unfortunately, we don’t know if stocks will skyrocket or crash next. Only time will tell…but we have a good reason to be worried.

• Investor sentiment has shot through the roof…

Look at the chart below.

It measures investor sentiment. A high level means investors are bullish. A low level means investors are bearish.

You can see investors have become extremely bullish over the last few months. According to this chart, investor sentiment is now at its highest level since January 2014.

Investors are acting like nothing can go wrong.

• President Donald Trump has a lot to do with this…

You see, Trump’s a businessman. He built a multibillion-dollar empire. He’s managed tens of thousands of employees.

Because of his background, many investors are betting that Trump will be good for the economy. That’s why U.S. stocks have climbed to record highs.

Look, we get the excitement behind this. But let’s be honest. Trump’s still a total wild card. That’s been on full display since he moved into the White House.

No one knows what he’ll do next.

He could sign a bill that creates thousands of new jobs. He could piss off one of America’s biggest trading partners. He could also say something that sucks the air right out of this rally.

In short, you shouldn’t be complacent, even if you like Trump.

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