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Beware: this could signal the FTSE 100 is heading for a crash

The FTSE 100 has enjoyed a solid, although not spectacular, 12-month period. As I write, the UK’s key index is sitting at 7,350 points. That’s a gain of around 6.5% since this time last year. So where does the index go from here? Can it keep moving upwards in 2018? Could it touch 8,000 points next year or is a correction on the cards?

15.1 P/E Ratio

In my view, the footsie doesn’t look excessively overvalued at current levels. While a forecast P/E ratio of 15.1 and dividend yield of 3.3% is by no means bargain territory, it’s certainly not bubble territory either. As I wrote here recently, many key stocks are well off their highs. There’s little exuberance associated with large-cap stocks – investors are too excited over Bitcoin instead.

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As a result, I believe our index has the potential to move higher. However, there is one thing that concerns me greatly at present. The US market.

Eye-watering valuations

US equities look expensive right now. The S&P 500 index has risen almost 20% over the last year and now trades on a forward P/E of 19. Many popular names such as the FAANG stocks (Facebook, Amazon.com, Apple, Netflix, Google) have surged higher at an incredible rate. Amazon is up 50% over a year. Apple and Facebook are up 48% and 47% respectively. Many of these stocks trade at eye-watering valuations. Amazon has a trailing P/E ratio of almost 300. If that alone doesn’t sound an alarm, this next market crash indicator should.

Directors are dumping stock

Top-tier executives will always tell you their companies have bright prospects ahead, but it’s what they do with their own money that really counts. Actions speak louder than words. Right now, FAANG directors are offloading huge quantities of stock.

For example, Facebook recently announced that founder Mark Zuckerberg will sell 35m-75m shares in the next 18 months. That’s a staggering $6.1bn-$13.1bn worth of stock at the current share price.

In August, Apple CEO Tim Cook sold $43m worth of Apple shares. This follows on from the $65m worth of shares he sold in 2016.

Last month, Amazon CEO Jeff Bezos sold a million Amazon shares for $1.1bn. That’s on top of the million shares he sold in May this year. Other Amazon executives are selling too. Over the last 12 months, directors at Amazon have bought just 60,000 shares. By contrast, they’ve sold 2.1m shares.

Directors don’t sell on the lows. If these guys are offloading large quantities of stock, it’s worth taking notice. It suggests that stocks are fully priced and that a stock market correction may not be far off.

FTSE 100 implications

Would a correction in the US have implications for the FTSE 100? Absolutely. If US equities experience a nasty pull-back, you can be sure our market will follow. For this reason, it’s worth examining your portfolio and potentially taking measures to protect yourself. Act now. Before it’s too late.

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Edward Sheldon has no position in any shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Amazon, Apple, Facebook, and Netflix. The Motley Fool UK has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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