This Stock Market Crash Indicator is Downright Scary Right Now

This stock market crash indicator is again dangerously overbought. It successfully marked the last two stock market peaks. Those peaks immediately preceded stock market crashes (chart below).

This proprietary indicator is one of several featured in Lee Adler’s Liquidity Trader. Get the current report right now and read Lee Adler’s Liquidity Trader risk free for 90 days! Subscribe by 11:59 PM Pacific Time Tuesday, May 7 and get the first month free (first time subscribers)! Quarterly billing will begin on the 31st day, unless you cancel before that date. The first 90 days from initial signup are risk free for first time subscribers.

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The Liquidity Trader CLI index’s annual growth rate is now 2.0%. This is down from a 4.5% growth rate in September 2017, before the Fed began its balance sheet bloodletting program.

The Stock Market Was Record Overbought On Friday

Meanwhile, stocks were up 10.1% year to year on Friday. As a result, the S&P 500 was as overbought versus the CLI as it was at the January and September 2018 peaks.

Both came just before market crashes. The second was far worse than the first. Three strikes and you’re out! This could be the third strike.

Notably, the earlier two events were 8 months apart. Now, the last peak was 8 months ago. Monday and Tuesday’s selloff (May 6-7) selloff could be the start of something. And it could be even bigger this time.

The Fed drained $50 billion per month from the financial system from October 2018 through April. That has dropped to $35 billion per month and is set to stay there until September, when the Fed says the draining will end.

The ECB and BoJ are also out of the QE business. I had expected that monetary tightening would cause the liquidity growth rate to slow to near zero as a result of these central bank actions. It hasn’t happened. The markets have created their own liquidity with soaring increases in securities-based borrowing – margin and repo.

That spells a massive buildup of leverage, way in excess of anything we have seen in the recent past.

Excess Leverage is a Stock Market Crash Indicator

Leverage alone cannot sustain a bull market. Speculative manias eventually flame out without the constant support of central bank money printing. Slow growth in bank deposits from surging margin borrowing and lending can only go so far.

Prices must continue rising for the borrowing that drives bank deposit growth to continue. In other words, under these circumstances, rising prices depend on rising prices. When that stops, traders take profits, and there’s not enough liquidity for enough buying to push prices up much. Prices start pulling back, money disappears, and that starts feeding on itself fast.

Meanwhile, we don’t know when the central banks will restart QE, pumping money into the markets. The Fed has talked about an open ended form of come and QE called a standing repo facility, but that’s a non-issue right now. A more severe market contraction along with contraction in the economy seems to be the necessary precondition for any kind of QE.

This post is excerpted and modified from This Indicator Says CRASH NOW!

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Stock market crash indicator

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both analytical and sales capacities. Prior to starting the Wall Street Examiner I worked as a commercial real estate appraiser in Florida for 15 years. I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. My perspective is not of the Ivory Tower. It is from having my boots on the ground and in the trenches of the industries that I analyze and write about today. 

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