The S&P 500 Index’s (GSPC) seven-day winning streak may come to an end on Thursday, but that’s the least of concerns for Axel Merk, president and CIO of Merk Investments. He tells The Daily Ticker that a stock market "crash" is highly likely next month and he has fully hedged his equity portfolio as a precaution.
“It’s not just because October is crash season,” he warns. “The stock market has been going up up up month after month. Volatility in the market is at very low levels. I don’t trust this market.”
In fact, Merk views volatility as the best indicator for finding bubbles in markets. The CBOE Volatility Index (VIX) has fallen below its historical norm as investors have regained confidence in the markets, a warning sign to Merk. "When everything goes up so smoothly, be careful," he advises.
Merk compares the stock market today to gold last April, when investors conditioned to "buy the dip" got burned by the metal's sharp decline.
So could the next downturn be as big as the stock market crash of October 1987, when the Dow Jones Industrial Average (DJI) lost more than 22% in one day?
“Oh, certainly,” Merk says. “The stock market is a risky game and that risk has been taken away in recent months.”
Merk recommends that investors “take some chips off the table” now versus staying long and trying to time the market’s top.
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