Investors are too complacent and the stock market could be headed for a sharp reversal this year, according to the investing legend who called Black Monday
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- A correction could be on the way for the stock market, according to Robert Prechter.
- The investing legend who predicted the 1987 crash says a 30% reversal wouldn't surprise him.
- Investors have become too complacent, Prechter said, evidenced by the low levels in the VIX.
Investors are getting too complacent about the strength of the stock market, and their unabashed bullishness could hit a wall as a big sell-off isn't out of the question this year.
That's according to the investing legend Robert Prechter, the founder of Elliot Wave International, who became famous for calling the 1987 stock market crash known as Black Monday, when the Dow Jones Industrial Average plunged 22% in a single session.
The market veteran says he's eyeing a potential plunge this year, and warns that investors have become far too comfortable. Prechter said in an interview with Fox Business Network on Monday that the market landscape resembles they years leading up to the 1929 crash.
"The market has been complacent for years. It's held up a long time, but this is the thinnest market I've ever seen on the upside," Prechter said. When asked if a correction of 30% is possible, he replied that a drop of that magnitude wouldn't surprise him.
He said the cards look stacked against the long-term outlook for stock investors, advising traders to move to safer bets.
"I'm frankly just not interested in being long stocks right now. I think we're going to have a great buying opportunity whenever the market decides to give us one," he added.
Prechter isn't calling for a violent crash like in 1987, but he noted the extreme bullishness among investors as a worrying sign that points to downside on the way.
Mutual funds are holding an "extremely" low level of cash, which suggests many are still betting on stock prices, Prechter said. Advisors are also the most bullish they've been since 2021. Meanwhile, the average stock exposure among money managers was briefly above 100%, which indicates that some were so bullish that they were leveraging their equity investments.
Stocks themselves are also flashing various warning signs that a correction could be coming. The Cboe Volatility Index, also known as the stock market's fear gauge, has hovered near record lows for a while, something experts have warned could be followed by higher volatility in stock prices. The VIX was about 13.74 on Tuesday, close to the lowest has been for the last six months.
Even the most bullish strategists on Wall Street have warned of some pain to come for the stock market. Fundstrat's Tom Lee, who nailed his 2023 outlook for stocks in 2023, warned investors of a 5% pullback in February or March, consistent with what's been seen in previous election years. Others have said that the strength of the Magnificent Seven will wane, and that the S&P 500 will struggle in 2024 as the other 493 firms in the index fail to pick up the slack.