The Trend

A Crash Could Be Imminent

Stocks are clearly in a bubble.

And like all bubbles, this one could soon burst.

It’s part of the reason some traders – the smart ones – are beginning to accumulate gold again, as a safe haven.  As much as we’ve enjoyed the euphoric rally above 21,000, we all know it just can’t last.  At some point, economic realities begin to chip away.

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At the moment, the U.S. economy has been rallying on cheap money, massive amounts of debt, and irrational exuberance.  History has proven that it can’t last, though.  In 1929, 2000, and 2008, markets soared just as they are right now before horrible stock market crashes.  And to be honest, we’re now long overdue.

In fact, the S&P 500 has gone more than 91 sessions without a 1% decline.   Considering Corporate American didn’t have the greatest fourth quarter on record, such a win streak is rather troublesome.  Granted, markets are forward-looking machine that’s clearly trading on hopes of President Trump’s stimulus efforts and tax plans.

But profit margins are slipping. 

In fact, corporate profit margins have been in a decline for the last few years after running well above 10%.  In the last 60-years, the average margins never exceeded 8.5%.  And both times it did, a bear market or crash followed shortly thereafter.

Retailers are closing up shop and showing the consumer is nearly tapped out.

Even average weekly hours are still falling.  In fact, when the economy shifts into recession, employers begin to cut back hours.  And that’s exactly what’s happening now. 

Major companies, like UPS is dramatically lowering 2017 forecasts. 

There are even fears of a U.S. March rate hike next week.  North Korea is firing missiles.  Oil prices are pulling back on concerns over Russia’s compliance with a global deal to curb output.  Chaos is erupting in France after Alain Juppe said he wouldn’t run in the election.  Even Deutsche Bank’s aggressive equity offering is weighing on stocks, as is China’s announcement that it was cutting its outlook.

Yet traders are still bidding the markets higher.  And analysts are more bullish than ever, which is a contrarian sign of potential doom and gloom, near-term.  At the moment, the average consensus forecast is that the S&P 500 will rally by about 4% to 5% this year.  The problem with that, of course, is that forecasts are rarely correct and serve very little purpose.  Nearly every big firm is bullish and expects the market rally to continue. 

We have to remember the old saying that bull markets are born in pessimism and end in euphoria, just as we’re seeing right now.  The bull market is on track to celebrate its eight-year anniversary in March 2017 – quite a sizable, long bull market by most standards.