3 signs the market is primed for a fall
Bullish sentiment is reaching a rare extreme. Here are some red flags for investors.
Stocks, as represented by the Dow Jones industrials ($INDU), continue to flirt with new all-time highs. The bulls are watching, wide-eyed, as the index threatens to clear massive technical resistance that goes all the way back to August.
Fresh stimulus measures from the European Central Bank, the "untaper" from the Federal Reserve, and easing of Chinese inter-bank lending conditions, and some better-than-expected economic data has all contributed.
And yet, beneath the surface, there are signs of trouble as bullish sentiment reaches a rare extreme. Here are three reasons to be cautious.
1. CEOs are pulling back
According to research from JPMorgan (JPM) analyst Nikolaos Panigirtzoglou, non-financial corporates in the G4 economies stopped soaking up their own equity in the second quarter for the first time since the Lehman Bros. crisis. And based on an analysis of announced share buybacks and leveraged buyouts, the situation worsened further in the third quarter.
The problem is that free cash flow is drying up, as shown in the chart above.
Not only have purchases slowed, but issuances are up with more IPO and secondary offering activity. You don't have to be an economist to understand the message CEOs are sending as they offer more supply and bid less demand. They think equity prices are topping. At least, in terms of bond prices.
2. Stocks are killing bonds
Futures from the CFTC shows that speculative investors are the most overweight in stocks vs. bonds since 2005.
Jason Goepfert of SentimenTrader notes that the relationship between stock prices and bond prices (stock prices high vs. bond prices low and yields high) has moved so far out of normal that the ratio of the S&P 500 and the 10-Year Treasury yield is three standard deviations from normal. In layman's terms, that only happens 0.1% of the time.
So it's rare.
The only other times bonds have underperformed stocks to this extent in the last five years was back in May 2013 and in September 2012. Both times were almost immediately followed by stock market declines.
3. Emerging-market stocks are down
Emerging-market stocks tend to be the leaders of any new market trend given their sensitivity to changes in the health of the global economy. They are vulnerable to shifts in both trade volume and commodity prices. So they act as an early warning system if all's not right.
So it's worth noting that the iShares Emerging Markets (EEM) is in free fall and has already fallen below its 200-day moving average for the first time since May. Back then, as the EEM fell apart in late May, the Dow didn't succumb to the selling pressure until late June.
For this reason, I continue to recommend clients look for opportunities on the short side via picks like the UltraShort Emerging Markets (EEV), up 10% since I added it to my Edge Letter Sample Portfolio on Nov. 4. My short against Tesla Motors (TSLA) is up 17% since Oct. 29.
More from Mirhaydari
- Did Twitter Break the Markets?
- 3 Reasons to Fear a November Selloff
- The Fed Needs to Step Up and Do More
Disclosure: Anthony has recommended EEV long and TSLA short to his clients.
Check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at email@example.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
"One reason stocks are not about to fall.
Another LOSER who failed to read: Fiat Money Inflation in France by Andrew Dickson White. DUMB is always over-confident until the last second before their new title- VICTIM. All told, the world had $50 to $60 Trillion in various currencies around 2000. Today, there are 3 TYPES of currencies- cash, debt instruments and derivatives and the sum total is now WAY more than $1 Quadrillion and accelerating. WHY is it accelerating? Because the over-printing of cash, dilutes all existing cash. Debt instruments accrue interest and costs. A key cost no one sees in ANY financial statement is in the managing and service of the debt. Derivatives have NEVER been reconciled. It is highly likely that MOST derivatives or syndications have no actual cash in them, they are filled with fake money and other derivatives (kiting).
Listen... there is NO EXCUSE for ignorance. You post here ad nauseum with condescending BS. YOU don't know crap about our degree of Risk. It was my career once. Anyone who raised any concerns or caution about the reaction to the actions of Inflationists were fired. In replacement came bubble-minded bubble-headed ignorant arrogant morons out to make a buck without the slightest clue of what has been happening.
The "Fed" and all other Central Banks know damn well that Austerity failed. The fiat money that was meant to sustain revenue generation (taxes) from the masses went to old wealth azzes who hoarded it or rigged the markets with it. Inheritors followed by turning every entity into a platform that forgot how or to enterprise. It isn't failure ahead, it's COMPLETE failure. To print more is to create a bubble in a bubble. Finance is already completely divorced from consumer society. If you snap out of your Kool Aid rush long enough, you'll note two things-- you are alone now and stick out like a sore thumb.
There is nothing to bail and no one going to jail and yet... it has to end. It's a conundrum... when the unstoppable force collides with the immoveable object. What happens, Einstein?
5 Signs Anthony is going to write another bearish outlook column.
Monday, Tuesday, Wednesday, Thursday, Friday.
How is it you are published? You have nothing to offer but the same column with different charts.
Stocks are suppose to fall because QE ends, not because we have gone a long time since a Major correction? Stocks are suppose to fall because QE ends, not because real wages are declining and consumers no longer have the buying power they once had. Stocks are suppose to do a ton of things, problem is, stocks rarely care about what they are suppose to do.
A situation of not "if" but when. Rule 1, when everybody starts to think that the current situation (market) is "normal" and will persist indefinitely, is precisely when the market will bite you on the a**.
be careful with tesla.The stock is worth less than $20 compared with Toyota sales.since owner of tesla is financial supporter of obama gets its stock inflated with fed money using colluded middlemen..
this is illegal but the lawless president has no problem to do illegal things as long he is sure that he is not going to jail..however longer term tesla has no chance to compete with big auto..and the growth of ev sales with primitive battery technology will be slower than tesla forecast
This is not new news! This is something that is just a matter of taking time to take effect. With our debt so high (Thanks Barry) that we are on the verge of bancruptcy, it is a wonder that the market has stayed strong for this long!!
And for Hillary and her ties to this administration which have f*cked up just about everything they have come close to ..... her Presidency will hinge on the economy which as we all know will take a dive, soon ... so besides that, her ties to Obama, her debacle in Benghazi, her terrible foreign affairs record .... you can pretty much count her out as the next President. People are going to be screaming for a change as the entire Democratic clusterf*ck comes to light and fruition!!! At least there is a silver lining in half the country losing half their money! President Christie - 2016
President Christie - 2016.
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[BRIEFING.COM] The stock market finished an upbeat week on a mixed note. The S&P 500 added just over a point, holding its weekly gain at 1.0% while the Nasdaq lost 0.4%.
The major averages began the day on an upbeat note, but relinquished their opening gains during the first 90 minutes of action. The early sentiment was boosted by a better-than-expected nonfarm payrolls report for February (175K versus Briefing.com consensus 163K), but a closer look into the report suggested that ... More
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