Financial Crisis: New Market Collapse on the Horizon, According to These 3 Signals

3 Key Signals Pointing to a Potential Financial Market Crash

In the midst of a looming financial crisis, experts warn that a new market collapse could be on the horizon, supported by three key signals.
Despite the S&P 500 maintaining a 5.6% increase since the beginning of the year, analysts caution that the ongoing correction from the late March highs could expand, leading to further sell-offs by funds.
Nomura analysts estimate that stock position liquidations of about $45 billion could occur if the S&P 500 were to experience increased volatility, with average daily movements of 1% over the next two weeks.
Deutsche Bank also shares these concerns, highlighting the possibility of a retreat in exposure.

Divergence between DJTA and DJIA

A significant signal indicating a potential impending financial market crash is the divergence between the Dow Jones Transportation Average (DJTA) and the Dow Jones Industrial Average (DJIA).
The DJTA consists of twenty transport sector company stocks, influenced primarily by business volume and interest rate changes.
During economic growth phases, transport volume tends to increase as companies fill warehouses and require raw materials to initiate production.
This increase in transport volume is anticipated by investors, who drive up stock prices in the transport sector.

However, there is currently a notable divergence between the performance of DJTA and DJIA.
According to Dow Theory, both indices should confirm each other to ensure market trend strength.
If a discrepancy between DJTA and DJIA is observed, it can be interpreted as a worrisome signal warranting investor attention as it could indicate a potential imminent correction in financial markets.

S&P 500 Correction

The S&P 500 index is experiencing one of its worst weeks since last October, with a decline of over 8% from the all-time highs reached in March.
The market correction was primarily triggered by a shift in perspectives regarding Fed interest rate cuts.
Economists and analysts now anticipate that the Fed may postpone rate cuts until September or even exclude them for the entire current year.

Among the stocks facing significant declines are well-known names like Nvidia, Netflix, Tesla, Kroger Co., McDonald’s, and Salesforce, with drops exceeding 10%.
Market breadth analysis provides further insights into the current situation, evaluating the participation of individual index stocks in market movements to provide a more comprehensive view of overall market health.

In the chart, periods where the percentage of bullish stocks exceeds 70% or falls below 30% are highlighted.
These extreme values are considered significant as they can indicate high participation in either bullish or bearish movements by stocks in the index.

Looking back over the past two years, a correlation is observed between the shaded green areas and market lows.
This suggests that when a significant percentage of stocks in the S&P 500 were bullish, the market tended to hit significant lows.
Conversely, red shaded areas often correspond to market highs, indicating that a high percentage of bearish stocks could precede a trend reversal.

In the current context, the fact that the bullish S&P 500 index has fallen below the 70% level suggests that a significant market peak may have occurred.
Furthermore, the indicator moving below the 50% level could indicate further market weakness and may foreshadow a broader decline in the S&P 500, with the indicator potentially reaching the 30% level.

Another significant clue is provided by the sudden increase in volatility: the VIX, the market volatility indicator, has surged over 20% and could indicate short-term pressures on stocks.
In this scenario, a cautious and gradual buying approach is advisable to mitigate risk in an uncertain market environment.

Weakness in Oil

Oil prices have experienced a drop of over 6% from last week’s highs, attributed to various factors.
Firstly, the increase in US commercial inventories has weighed on the oil market.
Additionally, news of weaker economic data from China has added further pressure on prices.
Progress in US aid to Ukraine and Israel has also influenced investor sentiment.

June Brent futures dropped to $87.60 per barrel, while May US crude (WTI) futures fell to $82.60 per barrel.
This marks the most significant decline recorded since March 20th.

Investors are keen to see how Israel will respond to Iran’s attack and if escalation will occur.
Moreover, in China, despite faster-than-expected economic growth in the first quarter, several indicators have highlighted domestic demand weakness, further contributing to downward pressure on oil prices.