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- Market bears calling for a 60% crash in the S&P 500 could soon be proven correct, Milton Berg said.
- The technical analyst said that stocks may be close to a final peak as speculation runs hot.
- Berg warned a recession appears likely based on several economic indicators that are flashing red.
Stocks might crash up to 60%, a recession seems likely, and market speculation has reached dangerous levels, a veteran technical analyst warned.
"These perma bears who are looking for a 60% decline in the S&P, and they've been saying it all along, they may finally be right," Milton Berg said during the latest episode of the "Forward Guidance" podcast.
A sell-off of that magnitude would take the benchmark stock index from above 5,000 points to about 2,000 points for the first time since 2016.
Berg was likely nodding to John Hussman, who's flagged the risk of a 63% plunge in the S&P 500, or perhaps Jeremy Grantham, who's raised the prospect of a 50% decline. Berg underscored that he's not predicting that big a plunge, and suggested stocks might drop only 8% to 15%.
Berg, a former advisor to elite investors like George Soros and Stanley Druckenmiller, now runs Milton Berg Advisors. He emphasized the stock market could rise further, but he noted that several technical indicators suggest it's approaching a final peak.
"The market's probably going to turn lower, and it probably will be a recession or at least a major slowdown," he said.
Berg pointed to the Fed's interest rate hikes, a low ratio of bearish put options to bullish call options, extreme investor sentiment, and significant market breadth as signs that stocks may be topping out. He highlighted the prolonged decline in the Leading Economic Index, the inverted yield curve, and pressure on industrial production as evidence of an impending recession.
The longtime analyst compared the ongoing rally in stocks — which has pushed the S&P 500 and Nasdaq Composite up by 27% and 38% respectively over the past year — to the run-up to the Wall Street Crash of 1929 and the dot-com bubble bursting in 2000.
Berg also noted that speculation has shifted from relatively niche assets such as meme stocks and SPACs in 2021 to blue-chip stocks that are widely owned, exposing many more investors to potential declines.
30% short
"As far as the real solid companies with good balance sheets and good earnings, there's far greater speculation now than you saw either in 2000 or in 2021," he said. "That's probably more fatal than speculation in companies that most institutions don't own."
Berg also disclosed that his portfolio is 30% short. He's betting against a basket of 20 stocks including Nvidia and Netflix that appear overextended and are likely to decline more than the wider market.
Several top-flight investors, analysts, and economists have warned in recent years that stocks were destined to crash and a recession was bound to hit, but the market and the economy have defied their dire predictions.
Berg might well be wrong about what lies ahead for investors, but he's worth taking seriously given his depth of knowledge and decades of experience.