3 signs the market is primed for a fall

Bullish sentiment is reaching a rare extreme. Here are some red flags for investors.

By InvestorPlace Nov 12, 2013 5:14PM

Image: Businessman reading newspaper © A. Chederros/ONOKY/Getty ImagesStocks, 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


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 anthony@edgeletter.c​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​om​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


Nov 12, 2013 9:25PM
The 3rd bust since the turn of the century is soon coming. 
Nov 12, 2013 10:20PM
What does a man profit when he gains the world but loses his soul
Oh they will fall. And fall hard. Think we, I mean they will tell you the truth causing panic? Use your head, but that is something the American bottom feeders aren't to good at. The govt is hoarding small items like food, fuel, meds, weapons and ammo. They will get the gold as well leaving you the ignorant tax payer wondering where the govt you foolishly elected, the few that actually voted, is when chaos breaks out. It already is. Everyday you hear of the plundering being done to the system by Wall Street, bankers and the crooks in congress. Shootings etc. etc.. Why you think they are doing it? Because the system is headed for a fall. A big one. I don't often feel the hair stand up on the back of my neck, but when I do, I cram more stuff into my bunker.  Stay thirsty my friends
Nov 12, 2013 9:05PM

"One reason stocks are not about to fall. 

1. QE"

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?

Nov 12, 2013 7:49PM

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.


Hey, I just noticed Anthony's back! I missed him and his charts. The lines going down from 09-13 looks very troublesome. In my small amount of knowledge, stock lines up=good, lines down =bad. Thanks Anthony for breaking it down for me.
Nov 13, 2013 4:11AM
It's not that folks are more Bullish than ever, it's that folks are spilling more Bull than ever. Money Changers are saying everything and anything to drain the last drop of money from investors. As long as folks keep pumping it in, they keep getting fatter Paychecks. Once that end, so does the Gravy train.

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.

Nov 13, 2013 10:33AM
The minute I saw the graphs, I thought for sure Anthony was back.   
Nov 13, 2013 10:25AM

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**.   

Nov 12, 2013 10:18PM
Money people can't bleed the people forever !!!!!!!.......Wise up America......!!!!!!!!!
Nov 12, 2013 10:16PM
The guy on the steet has known about the market tanking for months ......!!!! DUH......!!!!!!!
Nov 13, 2013 1:55AM
BKH 4480  The man who said stay thirsty my friend is correct but just like the great depression the insiders will sell short so people will have to be very careful!
Nov 12, 2013 9:58PM
What? You mean the "free' money banks are investing in the market instead of loaning in the free market is going to cause a bailout of the stock market by all the Jewish elite and Wall Street whores? You mean a market correction from over-inflated stock values is going to hurt only the general public and not the people who own Wall Street? Isn't that what always happens? Greed, only caused by greed. Those cheap dollars are only going to get cheaper.
Nov 13, 2013 11:23AM
Its fiat money!! The check book is empty! It will all come down in 1 day! Never in the history of the world has a nation been so far in the hole, even in the 30s great depression we still had gold to back up the dollar! We have "Obama's promises, how cool is that?
Nov 12, 2013 7:28PM
Eventually the force will be with you Anthony!
Nov 13, 2013 8:53AM
Duh! I'm just hoping the fall does not come until after Jan 2nd. I have stocks I want to sell but I don't want the tax hit this year.
Nov 12, 2013 6:17PM
hey, even a broken clock is right twice a day.

Nov 13, 2013 12:54PM
When will people stop listening to this Contrarian.  If you believe it go short.  End of story.
Nov 12, 2013 8:42PM

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

Nov 12, 2013 11:38PM

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 dollar index remained in the red in afternoon trading, which helped provide price support to commodities.

  • Crude oil had a nice run today, gaining over $2/barrel on a steady climb upwards. Oct crude oil finished the day $2.02 to $94.91/barrel 
  • Oct natural gas has a nice run today too, extending yesterday's gains. Oct NG closed 6 cents higher to $3.99/MMBtu 
  • Dec gold rose today by $1.40 to $1236.20/oz, while Dec silver gained $0.11 ... More


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