A 25-year market vet lays out 7 indicators that show him stocks are hurtling toward a devastating 60% crash – and shares 4 signals that will show when a bear market has already begun

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A trader rubs his eyes on the floor of the New York Stock Exchange
A trader rubs his eyes on the floor of the New York Stock Exchange.

  • Jon Wolfenbarger says he is “very convinced” a recession is coming in the near future.
  • He also says several indicators show stocks are due for a massive drop.
  • He shared with Insider the indicators that will tell investors when to get out.

Jon Wolfenbarger doesn’t beat around the bush.

A stock-market crash is coming, he told Insider on Friday morning.

“I think the next bear market will be worse than 2008, which will make it the worst since the Great Depression,” the former Allianz Global Investors securities analyst said. “I’m not necessarily saying that’s starting yesterday or tomorrow or right now, but I think it could be starting now.”

He added: “The S&P 500 fell 58% in 2008-2009. I think it could be worse than that. Somewhere over 60%.”

But such mammoth claims require convincing evidence. Wolfenbarger, who now runs Bullandbearprofits.com, said there are seven indicators that make him so sure.

Perhaps most obvious is the current average valuation in the market – historically high by just about any measure.

The Schiller price-to-earnings ratio is near all-time-highs. Or there’s the Warren Buffett indicator, which is the ratio of total market capitalization to GDP. It’s currently 30% higher than it was during the tech bubble around 1999 and 2000.

warren buffet indicator

Next is investor sentiment, which has been mostly bullish since the end of March 2020. Wolfenbarger pointed out that over-bullishness is a contrarian indicator, meaning it signals a downturn ahead.

He cited the fact that the put/call ratio is near lows that haven’t been observed in nearly 15 years, meaning investors have recently been buying bullish call options relative to bearish puts at historically high levels.

Then there’s margin debt levels, which has seen 70% year-over-year growth. The last two times that happened were before the 2000 and 2008 crash, he said.

Third is what he thinks is a weak economic outlook. “It’s remarkable that industrial production and employment have practically flatlined the last 20 years, really since the tech bubble,” he said.

industrial production index

Fourth, the US’s debt-to-GDP ratio is at a record high. Wolfenbarger said high amounts of debt has been the “hallmark” of every financial crisis in the past.

And then there’s the fact that he thinks the Federal Reserve has little left work with in terms of their policy tools, with interest rates near zero and their balance sheet at all-time-highs. Plus, inflation could continue to rise, which may force the central bank to tighten policy more than expected.

The final two indicators Wolfenbarger listed are ones that tell him that the bear market could already be underway.

First, the percentage of stocks on the New York Stock Exchange above their 200-day moving average has dropped from about 80% to around 58%. Second, the percentage of stocks on the Nasdaq above their 200-day moving average has dropped from 80-90% to 35%, he said.

“The market’s lost about five to six percent from the recent all-time-highs, which obviously isn’t a big deal. But if you look at the internals, quite a bit of damage has been done,” he said.

Wolfenbarger said it is possible that the market’s peak occurs before the end of the year. He also said the Fed tapering asset purchases and reversing bullish investor sentiment would trigger the crash. He warned, too, that it could be 10-15 years after a crash before the market recaptures its previous highs.

4 signals that bear market could be underway

Wolfenbarger shared three indicators that he believes will tell him a bear market has started.

1.) The price of the S&P 500 falls below its 250-day moving average.

2.) The price stays below it for an extended period of time and the 250-day moving average starts sloping downward.

3.) The 20-day moving average of the S&P 500 moves below the 250-day moving average.

4.) The 60-day moving average average of the S&P 500 moves below the 250-day moving average.

“If you have the price, the 20-day, and the 60-day all below the 250-day moving average, that’s pretty much the definition of a bear market,” he said.

Wolfenbarger’s views in context

It is difficult to find a mainstream institution on Wall Street with an official view that stocks could suffer a 60% crash in the coming months.

Yet, investors and strategists have indeed turned more bearish in recent weeks. Several big-name strategists have issued warnings that a correction is in store for stocks, and their view started to play out in early September.

Stocks showed strength again this week, though, with the S&P 500 rising up to 2% since Monday. Strong corporate earnings and strong 2022 GDP forecasts could also continue to lift stocks after their first 5% pullback since October 2020.

S&P 500 chart
Have stocks peaked?

But nothing is sure. There is an element of uncertainty around how stocks will react to Fed tapering, and it remains to be seen how high inflation will go and for how long it will stay at elevated levels, and how the Fed will react should inflation not be as “transitory” as it expects.

All of the above conditions laid out by Wolfenbarger also show how vulnerable stocks are – by historical standards – to suffering a larger downturn if a strong enough negative catalyst come along. So he’ll be keeping an eye on those moving averages in the months ahead.