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.
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.
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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.
"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!
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!
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".
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