4 signs this bull market is on its last legs

The signals are there, but investors don't yet seem ready for a dose of reality.

By MSN Money Partner Aug 13, 2014 2:08PM
Caption: New York, Wall Street, bronze statue of charging bull
Credit: © xPACIFICA/Getty ImagesBy Michael Sincere, MarketWatch

All bull markets end eventually, either with a whimper or a bang, although no one can say when. 

The good news is that if you are observant, a number of clues announce the end is near.

One of the reasons I've become cautious about this five-year bull market is I'm seeing warning signals, including the following four:

1. Rallies fizzle quickly

Many investors got excited when the market rallied 185 points last Friday. But if you looked deeper, you'd understand the spike wasn't as strong as it seemed.

For example, although the market went up by 1 percent, the volume was anemic. This indicates that the rally wasn't triggered by a broad-based number of institutions, but by a limited number of extremely large market players. Typically, strong rallies that occur on low volume don’t last very long, and this didn’t. The next day, although the Nasdaq Composite Index ($COMPX) was still strong, the Dow Jones Industrial Average ($INDU) was barely positive. In addition, for the bull market to continue, the 400 lost points must be won back, and soon.

Hint: Big rallies are common as the market transitions from a bull to a bear market. In fact, during a bear market, monster rallies are not surprising, but what happens next is important. For example, a strong rally that reverses direction intraday is a highly bearish signal. Astute traders take advantage of rallies in a bear market by using shorting strategies.

2. The market breaks key technical levels

The line-in-the-sand technical level is the 200-day moving average on the DJIA, which is 16,354. This price level was almost breached last week until the 185-point reversal rally. If the Dow had dropped below its 200-day moving average, that would have caused more technical damage to the market, and also driven a lot of institutional investors to sell.

Another technical level technicians are watching is 1900 on the Standard & Poor's 500 Index ($INX). If that price level is also breached (and not just for a day), it would be another clue the bull market is weakening. 

Keep in mind there will be strong resistance at these price levels. If there is a selloff in the future, don’t be surprised if the Fed appears to talk up the market. If the selloff is severe, they might even announce a new program (i.e. QE4, but that may be politically risky).

3. Breadth indicators show major price divergences

Two market breadth gauges to watch are the CCT (Cook Cumulative Tick) and New-High/New-Low (NHNL). As I wrote recently, the CCT is already showing a huge divergence between prices and the NYSE Tick. 

In fact, CCT creator Mark D. Cook said this divergence can’t continue indefinitely. It’s similar to keeping the accelerator pressed to the floor without letting up. Eventually, you will run out of gas. As I wrote in the column, the last time Cook saw this extreme divergence was in 1987, 2000, and 2007.

In addition, the NHNL is also showing a significant divergence. Although stock prices are moving higher, fewer and fewer stocks are also making 52-week highs. And the stocks that are making new highs are often unknown, smaller companies. This divergence is a warning sign. Basically, it means that the market is going higher but the former leading stocks are not participating.

4. Sentiment indicators reflect complacency

Even with the recent selloff, financial writers are extremely bullish. Retail investors, on the other hand, are less bullish than before, but according to a recent AAII Allocation Survey, cash levels in July dropped to 15.8 percent, the lowest level since 1999. This tells me that many retail investors are sitting on their positions while the market is making all-time highs. Although investors are told to buy low and sell high, they often do the opposite, and that seems to be happening now.

Also, the VIX (VIX) at 14, is not at historic lows, but is still in the basement (a low VIX reflects investor complacency, which is a bearish signal).

What the bulls think

As you may know, many pros believe this market is unstoppable. It’s true the Dow may ignore all of the above warning signals and retake 17,000 in a broad-based rally. The bull could then continue for several weeks or months.

However, as the market climbs without a significant correction, the more dangerous it becomes. We’ve already gone two years without a 10 percent correction, which is extremely unusual. Even with the 400-point licking during the last two weeks, the S&P is only 4 percent off its all-time high. In addition, the market has risen more than 180 percent since the March 2009 lows. To me, that is the definition of a bubble, and yet, the market could still go higher, and the bubble would grow bigger.

Back to reality

In spite of the best efforts of the Fed, financial media, and Wall Street, bull markets always end. Because the market doesn't go down in a straight line, however, the ending could play out for weeks or months. 

What will give investors a dose of reality? Watch what happens when the S&P falls by 50 to 75 points in one day on strong volume. Then everyone will know the bull market is really on its last legs.

More from MarketWatch

Tags: VIX
Aug 13, 2014 2:48PM
This guy writes an entire article about the prices of stocks, without every mentioning what the underlying companies are worth!

So many people seem to forget that stocks are just pieces of companies - they really aren't an entity unto themselves.  So, the price of the stock (eventually) comes down to the value of the business.

There are a lot of statements in this article that make no sense.  Saying that the market is up 180% indicates that it's in a bubble is nonsense, it depends on where it started and what the current valuations are.

Hitting 'all time highs' for the markets should be a fairly regular occurrence, because the markets generally go up in value.  In 1972, the Dow was at 1,000 - think of how many 'all time highs' we had to hit since then to get at the current value of 16,500 (i.e. lots and lots).
Aug 13, 2014 2:54PM
  The powers that be will do their best to keep this market afloat till the next administration or at least the next congress.
Aug 13, 2014 3:30PM

PANIC! SELL!,SELL! SELL! everyone head for the exits. How about you trim your positions, take some profits, go to cash , get out of speculative stocks, rotate to solid preferred's paying 5% interest like your local utility company and wait for the lemmings to jump ship and buy their stock cheap.

The idiots here sound like they are not going to pay their electric bill or their water bill and go hide in the fallout shelter.

Aug 13, 2014 3:19PM

 "If there is a selloff in the future, don’t be surprised if appears to talk up the market. If the selloff is severe, they might even announce a new program (i.e. QE4)......"


They have been 'talking up' the Market with toilet paper printed money for six or seven years!  

Aug 13, 2014 3:25PM
This article written by Michael SINCERE ???? Are you kidding me?
Aug 13, 2014 5:20PM
If the writer knows so much about the stock market he should be a millionaire and not have to write such trash.
Aug 13, 2014 2:25PM

good.  it can't and shouldn't go just up

Aug 13, 2014 5:10PM

How obvious can you be???

All bull markets end!

Yes, we will get a correction eventually!

On and on...

The big question is how does someone get paid for writing an article such as this? Your job is like hitting the jackpot!

Aug 13, 2014 5:03PM
SIncere states that there are four indicators that the Bull market is about to end, of which #2 is The market breaks key technical levels".   Then, he rebuts his position by stating that the market has come close, but has not broken these levels.   Does not make sense.
Aug 13, 2014 6:11PM
The economy is improving and the unemployment rate is dropping...but the sky is falling.
Aug 13, 2014 4:49PM
Aug 13, 2014 2:48PM
We have seen these articles constantly for the last 6 years ever since Obama became president and, yet, the market has remained strong.  The economy gets stronger every day so just looking at technical indicators that have meant nothing for the last 6 years seems like beating a dead horse OR someone WANTS the market to go down for greedy and/or political reasons.
Aug 13, 2014 3:02PM
Putin's actions do not help American wallets forever...How long will this drop in commodities last & that's assuming the drop trickles down to consumers which hasn't happened in SoCal. All real signs point to a correction which is healthy long term. Cramer is just another "expert" telling us all that the Titanic isn't sinking. The interesting thing is that he and his fellow comrades are hurting the markets by getting people to expand the bubble that's going to pop and in fact hurting the regular Joe. I want everyone to remember if Cramer didn't sell s the Brooklyn bridge everyday he wouldn't get paid his enormous salary. Cramer do us regular people a favor and be truthful for once and then maybe you'll be able to sleep once the bottom drops out.
Aug 13, 2014 6:21PM
It's nice that people talk about the market like it's a math formula, but there is a chaotic component called emotion and it's very hard to quantify. The market  goes up and it goes down all the time for no apparent reason, although there are many articles that will tell you exactly why, and most of them are full of crap.
Aug 13, 2014 6:21PM
Just because the bull is tired doesn't mean the bear is fresh!
Aug 13, 2014 6:33PM
Sincere wants it both ways: no follow through after a rally means the market is weak, but no correction means sentiment is bubbly.  Seems to me valuations are chugging up the wall of worry.
Aug 14, 2014 7:19AM

All good points to ponder. Reading the comments, you got some doubters. Me, every time I read a negative article, I sell a few while I wait for the you know to hit the fan. The writer is correct, the correction (or worse) will come we just don't know when.

So it is better to sell off near the top than to try and guess when it will come. I'm no pro but I've been playing this game a long time and every now and then the market can drop like a rock.

Remember the Fiscal Cliff that never appeared? It's out there somewhere and you ain't gonna like it when it appears. To show you how old I am, I remember the words of Davy Crockett in the first Disney movie: " The bigger they, the harder they fall".  

Aug 13, 2014 4:43PM
"This guy writes an entire article about the prices of stocks, without every mentioning what the underlying companies are worth!"
The leased office space they let- worthless.
The offshore accounts erased at the whim of the host nation- worthless.
Debt instruments that were never reconciled for legitimacy- worthless.
Overseas operations, nothing tangible here- worthless.
Executive administrative management that know nothing about enterprise- worthless.
Brands that once referred to quality but don't now- worthless.
Online ad revenues- worthless.

What was your point, qwerty?
Aug 13, 2014 7:13PM

5 - The printing presses run out of INK and PAPER
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