Credit: Shutterstock photoToday could be critical to your financial future.
The red flags I'm seeing right now are eerily similar to what I saw before several major corrections.
If my hypothesis holds true, then the next few days could mean the difference between earning outsized gains and losing 10%-to-30% in a matter of days.
For example, on July 18, 2014, I warned that the Russian market was in trouble . Sanctions were starting to take hold, and its economy was cracking.
I predicted we would see "dramatic negative reversals in growth and earnings" of the top holdings in the Market Vectors Russia ETF (NYSE: RSX ). This, I reasoned, would cause the fund to correct by at least 10% within three months.
Well, over the next 20 days, RSX plunged 9%. Within three months, it was down 15%, and within five months, shares had been cut in half.
More recently, on May 27, I warned that Chinese stocks were in a bubble . With a shaky fundamental foundation and ominous technical pattern, I targeted a minimum 9% drop in iShares China Large-Cap (NYSE: FXI ) -- an ETF that tracks the largest Chinese companies trading on Hong Kong's Hang Seng index -- by September.
The very next day, shares plummeted nearly 4%. And they just kept falling. FXI is down almost 20% in the two months since I made that call.
Now my research indicates another crash is on the horizon -- this time in the United States. And it's likely to be the biggest pullback in U.S. stocks since the 2008 crash.
For starters, one of the most important and predictive indicators I monitor -- the forward price-to-earnings (P/E) ratio -- is at an extreme level and showing all the signs of a correction in the making.
The last time it flashed a reading this high was at the end of 2009, and within six months, the market had undergone a correction. The previous time it was even close to this high was in October 2007, when stocks began a 17-month, 57% decline.
As you can see, the forward P/E is currently at a 10-year high. This might be more acceptable if we weren't more than 75 months into a recovery, well beyond the average economic expansion time of 58.4 months.
Making matters worse, this is only one of four major red flags I'm seeing in U.S. markets.
There's only one way for the forward P/E to get back to a more reasonable level that doesn't involve stocks falling, and that is for earnings to increase significantly across the board.
One way for companies to do this is to squeeze more profit out of every dollar in revenue they generate. Unfortunately, the second red flag says companies likely can't get any more efficient at turning revenue into profits. So the only way I see U.S. companies growing earnings is via mass layoffs, and I don't need to tell you what that would do to the economy or the market.
The third red flag reminds me a lot of what we saw during the dot-com bubble. It distills hundreds of years of market knowledge into one figure. While the S&P 500 has been flirting with all-time highs this year, this number has been falling and now points to -7% earnings growth in Q2.
The fourth red flag is perhaps the biggest warning sign. It has to do with the relationship between the world's reserve currency and asset prices. I called another correction based on the same anomaly we're seeing today in March 2011, and stocks fell 14% over the next six months.
But here's the most important thing you need to know about the current market situation: The house of cards is starting to collapse thanks to news breaking on all financial networks.
At best, hundreds of popular stocks could be at risk of 10%-to-30% losses. At worst, we may see a full-blown, long-term correction.
I put together a special presentation that details why I think stocks are doomed to fall in the coming hours... days... weeks... and possibly for much longer. I urge you to watch it immediately.
Click here to find out how you can prepare yourself.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
