SuttonWatch.Net: U.S. Stock Market: Is Another Crash Like The One In 1987 Possible Here?

Of course, the answer is yes!

Certainly possible, but maybe not probable? Please note the question mark behind this last sentence.

In my view, the probability of a stock market crash like the one experienced in 1987 has risen dramatically in recent weeks. If there is a crash, here is the list of contributing factors that will be on the post-mortem:

1. Most investor groups are fully invested.

2. In fact, NYSE Margin Debt is now at a record high, which means that "fully invested" now translates into greater than 100% invested (with the leverage of margin debt).

3. Complacency among portfolio managers and individual investors is now at the highest levels since 1987 as measured by the latest Investors Intelligence sentiment survey.

4. Bullish investors are now "certain" that the so-called "Yellen Put" will protect them from any meaningful stock market decline. This reminds me of the so-called "portfolio insurance" madness in 1987, where many fully invested portfolio managers thought they could increase their normal allocation to stocks to dangerous unprecedented levels with the idea that on any correction they could quickly sell stock index futures to hedge and protect themselves. Of course, they never realized that the market would decline 36% over 55 calendar days and 23% in a SINGLE trading day. As was the case then in 1987, and is still the case now, when the proverbial "shit hits the fan", who will step in to catch the falling knives?

5. It doesn't matter whether or not Scotland votes in favor of independence on Thursday, September 18th. The "horses have already left the barn, and the barn doors are shut". The whole idea of independence for Scotland and a long list of other regions (i.e. Catalonia in Spain) is now out there and will result in the formation of many new independent nations over the next several years. The EU as we know it today will NOT survive. The economic and political chaos from this inevitable outcome is now only beginning to be realized by investors.

6. Investors have completely underestimated the potential ramifications of the ongoing crisis in Ukraine. Sanctions against Russia are already being ratcheted up by uninformed leadership across the EU and in here in the United States. However, President Putin of Russia clearly holds all the cards in this "battle", and his longer term objective is a Russian-controlled Ukraine. Yes, Putin has already won the "war" in Eastern Ukraine, but he won't stop there. Kiev is his ultimate goal, and I for one don't want to bet against him. And on his way to Kiev, the potential dislocations in the financial markets can not be understated.

7. Corporate share buybacks, the lifeblood of the U.S. stock market over the last five years, are waning and will no longer provide the necessary support for higher stock prices.

8. Corporate profit margins, now near record levels, will soon deteriorate rapidly as the U.S. economy falters in response to significant mistakes in U.S. fiscal and monetary policy that are about to unfold.

9. The U.S. Federal Reserve is about to telegraph a path to higher short-term interest rates (away from its current ZIRP). While I think this is a significant mistake (rates should remain near zero to meet the challenges immediately ahead), it won't be the first time that the Federal Reserve (and the U.S. Treasury) has made a critical blunder at a key time in the economic business cycle.

10. Monthly-chart sell signals have been triggered by my computer trading system in most major indexes for the first time since July 2007.