Two signs a market crash is coming

Yahoo Finance

Some investors have been waiting for the rug to be pulled from underneath this market, with record high stock market levels and valuations feeling “toppy.” Yet, it hasn’t happened. The Dow Jones Industrial Average (^DJI) hit another all-time high this week and investors struggle with a fine balancing act of eking out the last bit of gain from this market, versus standing on the side lines and missing out on more of a rally. It is hard to recognize a market that is at its very peak.

Henry Blodget, co-founder and CEO of Business Insider, has been warning of a market collapse all year and believes that when it happens, it will happen in frenzied fashion. He tells me, “If history is prologue… there’s going to be a mad rush for the exit.”

When asked about the timing of this market plunge that he has been predicting since the year began, he refrained from providing a timetable in the interview saying, “Nobody knows and we won’t know until hindsight.”

But knowing vaguely when it could happen is crucial for knowing when to execute an exit strategy. Seeking signs, investors are looking for exit signals from the Fed, the markets and even industry insiders. Volatility (^VIX) and trading activity remain extremely low, another sign of a market nearing the top, according to technicians. Yet the markets continue to hit fresh all-time highs.

So how will a fall from the top look? Blodget says the market exodus will happen in a flash. “I think that the idea that there suddenly will be a light that changes from green to red and everyone who wants to exit can exit quietly and the market will quietly go down is crazy.”

There are two factors Blodget is watching as signs of impending market turnaround. First, he is watching the Fed and any change in direction. He believes that when the Fed begins to tighten policy, it is usually a harbinger of a pullback. The Fed, which is not moving rates just yet, has said it will begin to pull in the reins on its bond buying activity in October. That piece is set in motion, only to accelerate.

Blodget is also keeping watch on corporate profit margins -- which are at record levels. He says if we see any breakdown in those margins to even “normal” levels, we could see a reason for the market to turn.

Even with Blodget’s prediction, he says it isn’t necessarily a call to action for investors. Whether you short, sell or buy into a falling market depends on your goals. “It is different for every investor. There’s no uniform position…if you're investing for retirement with a time horizon of 10-20 years, there’s no reason to do anything,” he says.

And as history reminds us, even a frothy market can keep giving for many months or years more. Blodget says, “We saw in the late 1990s that this [bull market] condition can last for years. The bulls will point out it has been more expensive than this in the past.”

Shibani Joshi is the creator of www.ShibaniOnTech.com and can be followed on Twitter @shibanijoshi.

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