Kyle Bass says once the stock market starts to crack, this will be the first sign

Critical information for the U.S. trading day

Bloomberg NewsKyle Bass says this market resembles the 1987 debacle on steriods. DMAMBMCMDMEMGZFZGZQZRZSZTZU

The stock market may never go down again.

Maybe not such a far-fetched notion, when you consider the Dow industrials yesterday nailed its 50th record close of the year and paid a visit to the 23,000 milestone, which it looks set to revisit and maybe stick to today.

To mark the occasion, Pension Partner’s Charlie Bilello, the originator of that opening comment, went on a bit of a tweetstorm. He noted how reaching that 23K milestone in other times would be a classic contrary indicator, but will probably juice this bull market another 1,000 points — which itself is less and less of a big deal:

https://twitter.com/charliebilello/status/920484351984521217https://twitter.com/charliebilello/status/920473127284563969https://twitter.com/charliebilello/status/920480079267975168

To be sure, being in the trenches of this market since the election has been a bit crazy-making, even if it has made investors some money. And naturally, there is discomfort out there over the speed of gains, such as how the DJIA has overcome a pile of worries to gain 4,700-plus points in just under a year.

Given that, taking a step back and a look around is never a bad idea. That brings us to our call of the day from Kyle Bass of Hayman Capital Management, who has a timely warning on an “air pocket” that’s coming as we near the 30th anniversary of Black Monday.

“If you look at the all of the different constituencies of the market today, it resembles the portfolio insurance debacle of 1987 on steroids,” he says an interview with Real Vision TV released to YouTube today, but recorded a few weeks ago.

What will it take to set off a stock market correction? When a 4% or 5% decline in equities quicky morphs into a 10 or 15% decline. “That’s what you have to look for,” Hayman’s chief investment officer says.

“If you see the equity market crack 4 or 5 points, buckle up, because I think we’re going to see a pretty interesting air-pocket, and I don’t think investors are ready for that,” Bass warns.

What’s exacerbating the situation is the massively popular shift from active to passive investing over the years. That means risk is “in the hands of people who don’t know how to take risk,” the hedge fund manager says.

Other big names in finance gave Real Vision interviews for its piece on the potential for a major market correction — the problem with valuations right now, the parallels to 1987 — and of course, what investors should do now.

For one, the Felder Report’s Jesse Felder says buying the stock market is “essentially taking on an incredible amount of risk ... for the prospect of zero reward over the next 10 years.”

The message overall was clearly to cut back on a bit of risk, look at cash, and peel back a bit on where there have been some good runs.

Don’t miss: Wall Street pros recall “sheer panic” of October 1987 stock-market crash

And: What would happen to ETFs, not around in 1987, if we got a repeat of that big crash?

Key market gauge

DJIA (XCBT:YMZ7) , S&P 500 (GLBX:ESZ7) and Nasdaq (GLBX:NQZ7) futures are rising. Gold (XCEC:GCZ7) is flat, and the dollar (IFUS:DX-Y.NYB) isn’t doing much either. WTI crude (XNYM:CLZ7) and Brent (IFEU:LCOZ7) are rising after data showed falling U.S. stockpiles. Official U.S. supply data is due later.

Asian markets (:ADOW) rose as China’s party congress kicked off. In Europe, the DAX (^GDAXI) was headed for a new closing high.

Read: China’s Xi makes swipe at ‘America First’ — and 4 other key parts of his big speech

See the Market Snapshot column for more.

The chart

The metals and mining sector has found some new life in the second half of this year, notes Greg Guenthner in a blog post for Daily Reckoning.

“Right now, I’m all about industrial metals,” he says, noting that strong data out of China has been lifting copper skyward. That metal (XCEC:HGZ7)  hit the highest settlement since August 2014 on Monday, and is up nearly 8% so far this month.

Check out his post for ideas on how to play that run for copper and other metals.

Earnings

IBM (IBM) managed to beat expectations for profit and sales, but don’t get too impressed as it’s all about avoiding taxes.