The warning signs of a stock market crash in 2014 are getting harder and harder to ignore…
Several prominent market watchers, including Ben Inker, head of the asset allocation group at GMO, and John Hussman of the Hussman Funds, say the markets are about 40% overvalued.
Last week, Yale Professor Robert Shiller, a Nobel-prize winning economist, expressed concern that stocks may have gotten ahead of themselves.
"I am most worried about the boom in the U.S. stock market. Also because our economy is still weak and vulnerable," Shiller told the German magazine Der Spiegel.
These analysts referenced a number of crash indicators nearing "warning" levels, which we've detailed in the charts below.
Of course, none of this means investors should run out and sell every stock they own in a blind panic. But it does mean investors absolutely need to proceed with caution, choosing stocks in stronger sectors and using trailing stops. [Here's a detailed plan on how to protect your money from a stock market crash.]
Now let's take a look at those seven charts pointing to a stock market crash in 2014…
The Seven Charts That Warn of a Stock Market Crash 2014
These charts provide worrisome clues that the stock markets are seriously overvalued and due for a big correction:
Stock Market Crash Chart #1: Shiller's CAPE Ratio
The cyclically adjusted price/earnings (CAPE) ratio, created by Robert Shiller, smoothes out the price/earnings (P/E) ratio by averaging it over 10 years. Now at 24.42, the CAPE is substantially above its long-term average of 16. And more ominously, the CAPE has only been higher twice – at the end of the 1920s, just before the Stock Market Crash of 1929, and at the end of the 1990s, just before the dot-com stock market crash.
Stock Market Crash Chart #2: The VIX
The VIX measures market volatility, and is commonly referred to as the "fear index." A higher VIX indicates more concern among investors and often accompanies downturns. As the markets headed toward the 2009 lows, the VIX was between 40 and 60. But it's down 28% in 2013 and is currently hovering around 14. Similar measures also indicate little concern among investors of a market crash. High levels of confidence in the markets often precede crashes.
Stock Market Crash Chart #3: NYSE Trading Volume
The markets have reached record highs on declining trading volume, which indicates weakness. This tells us there are fewer and fewer buyers, which will make it harder for stocks to continue their push to new heights. And when things go south, a lack of buyers will only accelerate the decline.
About the Author
Dave has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.