There are plenty of asset managers and government officials warning that stock markets are riskier than they have been for a long time, with some even warning of a market crash. But not all of their analyses are particularly persuasive; some are just fear-mongering or an effort to say “I told you so” if markets do crash.
Relatively few analysts can give you sound technical, historical or fundamental reasons for a potential stock market crash. This article reports on one manager, Peter Toogood of Embark Group, who actually has identified the Achilles’heel of this stock market and why a catastrophic crash could be in the cards.
Toogood says that because this bull market is almost nine years old (with a few corrections along the way), and because the economic expansion is just as old, pretty much every investor who wants to get into stocks is already in. Put differently, there’s no money “on the sidelines” waiting to get back into the market as there was in 2009 and 2010. This means that if stocks hit an air pocket, there’s no liquidity pool of reserve buyers to cushion the fall.
That’s exactly what happened between Feb. 2 and Feb. 8 when stocks dropped over 2,500 Dow points, or 11%. Since then, stocks have recovered somewhat and market volatility has calmed down. But Toogood’s fundamental point remains valid.Volatility and drawdowns are still in the cards, and when they hit you can expect stocks to drop even more dramatically in less time than they did in early February.
With a mild stock market recovery the past week, this is a good time to lighten up on stocks at good levels and increase your allocation to cash. That way you can go shopping for bargains when the next air pocket hits stocks.