5 critical threats to the bull market

Is it time to jump off the bandwagon, or keep riding this surge to new records?

By StreetAuthority Apr 8, 2013 5:07PM
View of Wall street icon. © Grant Faint, PhotographerBy David Goodboy                                                     

Nothing good lasts forever, including the amazing bull market that investors have enjoyed this year.

Fueled by ultra-low interest rates, solid corporate earnings and a Federal Reserve that says it will do whatever it takes to jump-start the economy, stocks have been breaking record after record as they surge higher. The Dow Jones Industrial Average has rallied more than 1,800 points since Jan. 1 -- and money keeps pouring into the market.

But I have noticed five specific clues that are pointing toward an end to this extremely bullish market cycle.




1. Headline risk
When you start seeing the media boasting about how great the stock market is performing and how everyone is getting involved, it's time to be extra cautious.

Over the weekend, I came across bearish signals from two distinctly different places: a Wall Street Journal article titled "Mom & Pop Run With the Bulls," and a cab driver who offered me stock tips.

While traveling down Fifth Avenue in downtown Manhattan, the taxi driver overheard me talking stocks on the phone and offered his favorite companies -- and even a few trading tips.

It is amazing how much everyone thinks they know about the market and trading. It's said on the Street that once you hear the shoe shiner, barber and cabbie talking about the market, it's a sure sign that bullish trends are coming to an end.

No one knows for sure, but I am certain there are several former hedge fund managers driving New York City cabs right now, so maybe my stock-picking cabbie managed a $100 million short-selling fund last year. Who knows? 

When I see this type of behavior in the stock market, it gives me flashbacks to "Black Monday" crash during the late summer of 1987, when the writing was on the wall. The Dow Jones Industrial Average dropped 22.61% in one day -- its largest decline in history.

2. Global uncertainty
There seems to be another crisis arising in the eurozone every day.

First, it was Iceland's financial crisis, Spain's bailout and then Greece's extreme debt issues. Now Cyprus is actually seizing bank accounts to pay its national debts, as I mentioned recently.

While we may feel insulated in the United States, the worldwide financial system is interconnected to a surprising degree. What's next in the eurozone? Will Italy or an even larger nation reach out for help?

It's possible the United States will eventually be asked to step into the fray to assist. This is a very real concern and may weigh heavily on the stock market, should rumors even begin. In addition, growing tension from North Korea may also soon bring pressure to the stock market.

3. Higher interest rates
Although Federal Reserve Chairman Ben Bernanke has assured investors he will not consider raising interest rates until the unemployment rate drops to 6.5% from its current 7.6% -- which isn't expected to happen until 2015 -- growth in payrolls or a jump in inflation may trigger an increase.

In addition, the Fed could start cutting back on its massive bond-buying this summer should the economy continue to pick up steam. The extremely bullish effects of the Fed's $85 billion monthly purchases in Treasury bonds and mortgage-backed securities is pushing down interest rates and encouraging businesses to hire.

John Williams, president of the San Francisco Fed, has expressed optimism in the plan.

"I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer. If that happens, we could start tapering our purchases then," Williams said recently. If this occurs, then it will have dire effects on the bull market.

4. Too much risk-taking
Risk-taking is exploding in today's market.

Remember, excessive risk is what led to the financial crisis in 2008 and it can easily happen again. More than $150 billion in junk bond debt has been issued in the first quarter. If the warnings of a bond market bubble bursting turn out to be accurate, then high-yield bond investors could suffer massive losses.

5. Another housing bubble
The housing market has been rebounding since late 2012 and has been naturally expanding since hitting rock bottom. In addition, the Fed's low-interest-rate policies have greatly helped the growth.

But reports from Washington say the Obama Administration is encouraging further growth by directing banks to lend to risky borrowers.

Yes, this is exactly what caused the housing bubble crash, and it will repeat, should consumer debt loads become unmanageable once again. Adding to this worry is the 6.4% growth of household debt in the fourth quarter of 2012 -- the biggest jump since 2007.

Risks to Consider: While these five points are signals the bull market may be topping out, no one knows for certain when or if a pullback will actually happen, and there's no telling how sharp it may be.

Action to Take:  While there are still great investments available, it's good to exercise caution as the markets reach new highs and the economy begins showing similar signs seen during the months leading up to the previous financial crisis.

More from StreetAuthority
34Comments
Apr 8, 2013 5:35PM
avatar

would you like a few trillion more reasons?

 

spend a dollar a second and it takes 11.5 days to spend a million.

 

spend a dollar a second and it takes 37.5 YEARS to spend a trillion.

 

fed printed money since 2009 = approx. 3 trillion

 

added national debt since 2009 = approx. 7 trillion

 

non-US central banks printed money = approx. 13 trillion

 

increase in unfunded US entitlements and US consumer debt = you don't want to know

 

what happens when it all hits the fan and the one percent walk away with more billions of loot? = you really, really don't want to know

 

  

Apr 8, 2013 9:03PM
avatar
Household debt going up. National debt going up. No matter how hard we try we can't borrow our way out of debt. With a smaller percentage of people to pay the debt we must cut spending by eliminating waste not needed services. We can do it but everyone has to work to do it. Households need to curb personal debt as well. 
Apr 8, 2013 8:52PM
avatar
What does be cautious mean?  To me it means gamble only with the house's money.  If you have made a few bucks this year put at least half your winnings in cash or a very short term bond fund (much better return than money market) .  If more comes in over the next few months take all those winnings out.  The market must return to a mean of around 6 to 8% which means a very big correction from this 15% growth.  When it drops 10 to 15% start buying with maybe a quarter to a third of your cash every 4 or 5 months as the market falls.  Then as the market recovers, as it must, watch your seeds grow.  That's being cautious!  You can't lose by cashing in your chips and you can't lose by buying low.  By being cautious you will have done both.
Apr 9, 2013 3:30AM
avatar
Actually there is only one REAL Threat to the Bull Run. Funny how it's just that, Bull. The real threat is Global Money printing that can't go on forever. We are long past the point of no return. Soaring Debt without rising interest Rates has caused a severe imbalance that once corrected, will have severe consequences for everyone.
Apr 8, 2013 7:57PM
Apr 9, 2013 7:37AM
avatar

First... wiser minds would have challenged Bernanke's crusader remarks about doing anything it takes to jumpstart the economy. Essentially, arresting him, shutting down the Fed and calling all the fiat fake and retrieving it from banks-- would actually jumpstart the economy by compromising corruption and rampant psychopathy. We are worse hanging in the lurch than crashed and rebuilding from scratch. A tower denotes power. Fiat funding builds power towers. Who can remotely deny that now? It should be evident that when a massive percent of the able and capable population no longer looks for work- that the sub-economy grows and the primary economy blows. I think one of the main tinders right now has to be Congress. Fully inept and unable to remotely recognize the incredible security threat that finance and Wall Street are today, is a mistake of epic proportions. Being at odds with the President is nature, but stonewalling America into a corner forces a rabid People to dismantle bureaucracy as it has done many times before. Wealth can't hire an army if the families of the soldiers are storming the towers and mercenaries are busy just trying to not be trampled to the ground by uncorked anger originally compressed into the bottle by making too much fiat money and infusing it solely into the heart of what is corrupt. What Wall Street fears is a monster of their own making and the fact that slaying it is suicide while delaying it is a one way ticket to pain and horror well-beyond their greedy little imaginations.

 

Here, let me say it again... where do you go once you've screwed the whole world? You don't. You pay. Crime doesn't pay.

Apr 9, 2013 1:43PM
avatar

VL: I have a number of great blue cheap stocks that pay great dividends.Yes, I have

an exit plan if we get  Republican President and the market tanks.

Apr 9, 2013 11:55AM
avatar

Most people are lousy investors.If they were good, they would be thrilled about the market

since it`s up over 100% in 4 years.If you`re not happy about doubling your money in that

short period of time nobody can help you.

Apr 9, 2013 12:26PM
avatar
You're wrong we're in another housing bubble. Also, the Obama administration encouraging further growth by directing banks in some ways to be more accomodative comes nowhere close to asking for the type of risky lending that contributed to the housing bubble crash. Helping financially stressed borrowers who were never subprime to begin with, and still own homes they've managed to hold onto this long, simply be allowed to refinance at today's low rates would make a big difference in the long term health of things and in no way create a "housing bubble". For many decades the real estate market was at neither extreme, it needs to get back to that middle ground. Obviously it's had a little jump recently coming off a decline worse than it had during the Great Depression. But to suggest we're in bubble #2 now is absurd.
Apr 9, 2013 12:59PM
avatar

Ben Bernanke is competing with Alan Greenspan for the "most clueless" contest.

We will never have an actual recovery on main street, until we get the fed "out of the way" and let market conditions dictate interest rates and the economy.

When people earn a reasonable rate of interest on their CD's, then and only then will they have the income and confidence to spend.

If you put Bernanke's brain in a bird, it would fly backwards.

Apr 9, 2013 12:52PM
avatar
""the Obama Administration is encouraging further growth by directing banks to lend to risky borrowers""

Obama is a jacklazz and I'm sure he is spending his days trying to figure out how to blame Bush again for his and his parties failings.
Apr 9, 2013 1:19PM
Apr 9, 2013 1:28AM
avatar
"Headline Risk" ??? The only headlines I read are people saying the bull market will end with a crash
Apr 9, 2013 8:01AM
avatar
It's time to bail in May! Here's why:
Apr 9, 2013 12:15PM
avatar

ACTIVE RIA:If the money wasn`t spent we`ld be in a depression.Who wants that? Well,

Republicans do, so they can blame Obama.

Apr 8, 2013 11:14PM
avatar
since I am too stupid to understand the market, why bother reading this article?
Apr 8, 2013 8:51PM
avatar
I need to make a deal with some investors because here's the deal.....they can short ALL their stocks then I can put everything I have into the stock market and as sure as hell the next day the market will tank....anybody in on this??? That's about how stupid this whole stock market thing is. We might as well all go to Las Vegas like the banks do!!! At least we'll have SOME fun :-)
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

115
115 rated 1
269
269 rated 2
445
445 rated 3
614
614 rated 4
684
684 rated 5
678
678 rated 6
608
608 rated 7
454
454 rated 8
310
310 rated 9
138
138 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
ARCPAMERICAN REALTY CAPITAL PROPERTIES Inc10
ATVIACTIVISION BLIZZARD Inc10
BIDUBAIDU Inc10
BMYBRISTOL-MYERS SQUIBB CO.10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.