Market crash warning: Red alert issued

Investors at the Auckland Stock Exchange during the October 1987 crash. Photo / Herald Archive

A prominent analyst has issued his second warning over the growing risk of a severe fall in stock markets.

In a new report, HSBC's head of technical analysis, Murray Gunn, warns that recent selling on Wall Street has been worryingly broad-based.

"With the US stock market selling off aggressively on October 11, we now issue a RED ALERT," Gunn wrote, according to Bloomberg.

"The possibility of a severe fall in the stock market is now very high."

While Gunn's warnings have focused on US equities, a major sell-off on Wall Street would quickly spread to other markets, including New Zealand's NZX, and take a heavy toll on KiwiSaver balances.

Earlier this week, HSBC global equity strategist Ben Laidler told Bloomberg TV that sharemarkets were dangerously exposed to a combination of risks.

His concerns included next month's US presidential election, high earnings expectations for companies and uncertainty around economic policies.

Gunn's red alert follows another report published on September 26 in which he drew parallels between late 2016 and the same period of 1987, ahead of that year's infamous October crash.

That report identified a "head and shoulders" trading pattern in Wall Street's Dow Jones Industrial index that also emerged over the Northern Hemisphere summer of 1987.

"A similar pattern occurred at this, often bearish, time of the year in 1987 before the index fell dramatically," Gunn said.

Such a pattern involves a market peak - which the Dow hit on August 15 in this year's case - with two lower highs on either side of it.

There is a school of thought in markets that views such patterns as a potential indicator of a severe sharemarket downturn.

Gunn is warning of dire consequences should the Dow - which closed at 18,098.94 this morning (NZ time) - fall below 17,992.

Falling beneath that level was looking increasingly likely and would be "a clear sign that the bears have taken over and are starting to feast", he wrote.

Many investors are questioning how long an extended bull-run in equities can be sustained, particularly if US interests rates begin rising and bond yields move higher, making stocks less attractive.

The New Zealand equity market, which has a reputation as a lucrative source of dividends, has benefited from low interest rates and the global search for yield, which has driven the S&P/NZX 50 index to record levels.

But the NZX has underperformed its peers in recent weeks as high dividend-paying stocks have fallen out of favour, prompting international money to move out of the New Zealand market.

The S&P/NZX 50 has fallen 6 per cent from the record high of 7571.105 it reached on September 7.

Still, it remains up 12.5 per cent in the year to date and close to 200 per cent higher than its early 2009 low.