You can always find signs of an impending stock market crash, if you look closely enough. You have to treat the warning signs with caution, though, as other numbers may suggest the complete opposite.
However, I have stumbled across three signs that, combined, appear to suggest we could be in for a bumpy October.
1. Stock markets look overvalued
The Shiller price-to-earnings ratio, which values the S&P 500 Index by dividing share prices by the 10-year moving average of inflation-adjusted earnings, suggests the US stock market is expensive. It has the index currently trading at 29.46 times the earnings of its constituent companies, almost double its median average of 15.74.
This figure is almost identical to Black Tuesday 1930, directly before the Wall Street Crash. The only time the valuation was higher than it is today – a record 44.19 times earnings – was at the turn of the millennium, just before the dot.com boom went bust.
This particular warning sign has been flashing red for several years now, and shares still haven’t crashed, as rock-bottom interest rates have kept the market moving merrily along. Rates are falling again right now, which could give us some respite.
2. Chief executives are stepping down
In August, 159 chief executives in the US stepped down, a monthly record, according to data from recruitment firm Challenger, Gray & Christmas in Chicago. So far this year, 1,009 CEOs have moved on, the highest recorded total for the first eight months of the year, up 15% on 2018.
As AJ Bell investment director Russ Mould points out, CEOs tend to move on when the company share price struggles, boards and investors are ready for a change, activists are getting antsy, or the executive wants a fresh challenge.
Mould says it seems odd that so many are stepping down with the S&P 500 Index within touching distance of its all-time high. “This would lead the more cynically minded to wonder whether some are getting out while the going is still good, share options intact, or whether trading is quite as strong as share prices would leave us to believe.”
You might have your own theories.
3. Directors are selling shares
Staying in the US, directors and other senior officers are offloading their company shares at the highest rate since the financial crisis, selling $600m worth of stock every single day in August, according to research firm TrimTabs.
They have sold more than $10bn in a single month five times this year, with tech stocks Facebook, Amazon, Apple, Netflix, and Google most likely to be sold, although that may just be a consequence of their size. Jeff Bezos splitting with his wife MacKenzie may also have had a part to play in the Amazon sell-off, although other insiders are selling too.
Again, there may be nothing suspicious about this profit-taking – it makes sense with the stock market close to a record high. It’s something to bear in mind, though. Especially since some UK stocks are flashing warning signs too.
We at the Fool are not afraid of falling share prices. In fact, we see them as an opportunity to pick up our favourite stocks at reduced prices. These three factors suggest there might just a tempting buying opportunity ahead.
Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.