The FTSE 100 has had a rough start to the year. After a steady 2014, the FTSE 100 has charged in to 2015 and for many investors, now could be the perfect time to sell up.
You see, the market seems to be in the final stages of a bull market and warning signs, of an impending market crash, are starting to flash.
1. Volatility
Historically, one of the traits that has always preceded a market correction, or crash, has been an increased level of volatility following a period of exceptional calm.
And 2014 was an exceptionally calm year. Indeed, the VIX, or ‘fear gauge’ as it’s known on Wall Street, traded below 15 for much of 2014 and at one point the index traded as low as 11, one of the lowest levels recorded for two decades. A high reading on the VIX indicates increased volatility, during Sept 2008 the index surged to 60 as markets plummeted.
So 2014 was reactively calm but 2015 has started with a bang. The VIX has nearly doubled over the past few weeks as traders have started to get jumpy and commodities have sold off.
2. Dr Copper
Copper has a reputation for its ability to predict turning points in the global economy. Copper is used in almost all industries so high demand, or increasing economic output, usually pushes the price of the base metal higher.
However, a lack of demand and falling prices may indicate an economic slowdown.
During the past few days the price of copper has plunged to a nine-year low, after the World Bank cut its global growth forecast on concerns over the Chinese property market.
But it’s not just copper that’s slumping, all commodities are taking a hit. The Bloomberg Commodity index, which tracks the prices of 22 different commodities, peaked at the end of April 2011 and has dived to a 12-year low.
For the FTSE 100 this is really bad news. Collapsing commodity prices signal slowing global growth and many of the FTSE 100’s constituents are active in the commodity sector. Earnings are set to fall across the whole commodity industry and the FTSE 100 will suffer as a result.
3. Unbalanced optimism
Finally, investors are too optimistic. In the past, all crashes have been preceded by high levels of investor optimism. It’s usually the case that as investors become over optimistic, they fail to correctly identify risk, taking risky bets and borrowing too much money in order to increase returns.
According to the RBC capital markets market sentiment indicator, investor optimism is currently at ten-year highs. This data is based on the number of open positions, bets on the market going up and feedback from financial advisors’. What’s more, margin debt — money borrowed to buy shares — at the New York Stock Exchange, hit an all-time high at the end of last year.
The bottom line
There are many reasons why the market could suddenly decide to take a dive. While there are several warning signs flashing red right now, it’s almost impossible to accurately predict the next crash.
