Bulls should heed these 5 warning flags

The stock market has been very resilient but investors should keep a close eye on T-Bonds and the dollar.

By MoneyShow.com May 28, 2013 1:43PM

 Bull copyright Photographers Choice RF, SuperStockBy Jim Stack, InvesTech Research

While bull market tops can be unpredictable, there are five key warning flags that we are currently watching that will help identify the risk of a possible bear market ahead.

Rather than following the deficit battles in Washington, investors should focus on both the 30-year T-Bond and the U.S. dollar for a loss of confidence in the Federal Reserve.

No. 1: 30-year T-Bond yield. If the economy starts to stagnate, even in the face of easy Fed monetary policy, 30-yr T-Bond yields could drop to a new low-which would carry a deflationary message of probable recession.

No. 2: U.S. dollar index. The U.S. dollar has been remarkably stable -- as Goldilocks might say, "Not too strong and not too weak." However, a major warning flag would occur if the dollar suddenly drops to the lows seen in 2008, putting upward pressure on long-term interest rates.

Key technical indicators, such as breadth and leadership, will also give us insight on underlying market strength (or early weakness).

No. 3: Advance-decline line. When bull markets begin to form a top, investors become more selective and market participation narrows. This is when the advance-decline line, one of the most reliable bear market warning flags, begins to diverge from the major market indexes. So far, the A-D line has been steadily leading the indexes higher.

No. 4: InvesTech Bellwether Index. The economically sensitive InvesTech Bellwether Index is designed to forewarn investors when they should start battening down the hatches in advance of a significant decline. Prior to the last four bear markets, this index diverged well in advance of the S&P 500. Currently, no trace of a divergence can be seen.

No. 5: NLC distribution. The "distribution" component of the Negative Leadership Composite is one of InvesTech's best gauges of bear market risk.

It is a "fail-safe" tool that forces investors to assume a more defensive stance when downside leadership (the number of stocks hitting new yearly lows) starts to accelerate-as it does during every bear market. In the absence of a "distribution" reading below zero, we continue to give this bull market the benefit of the doubt.

The media may be touting the "Sell in May and go away" mantra, but even the seasonally softer summer period realizes gains the majority of years. In fact, during bull markets since 1928, the May-October period was positive 78% of the time. In contrast, whenever the market finished May-October with a significant decline of more than 10%, it's been in the midst of a bear market with other warning flags present.

Today those warning flags are notably absent, and the weight of evidence outlined in this issue suggests the bull market remains intact. However, the current slow-growth economy dictates that we remain exceedingly vigilant for signs of weakness and flexible with our strategy going forward.

Subscribe to InvesTech Research here.

More from The MoneyShow

May 28, 2013 2:41PM

No. 6: You or your neighbor still cannot get a job.

No. 7: The US government has not fundamentally or structurally changed anything to correct itself, except spend more and get deeper into debt.

No. 8: The Fed may stop printing money soon; i.e. no more stock market supplements.

No. 9: Taxes, health insurance, food and other costs will continue to soar, albeit, inflation is not a problem according to the Fed and when No. 8 ends, big trouble a brewing - no more unemployment benefits or other "stimulus" will be available for folks to buy their everyday goods.

No. 10:  Only thing left to hang our hats is oil and natural gas, everything else is bullpoopy.

May 28, 2013 2:51PM

The only function of economic forecasting is to make astrology look respectable.

May 28, 2013 3:15PM
This is the new bizzaro Bernanke world order, where governments set the price of assets. Don't anyone worry, we've got bizzaro Ben at the helm. He didn't see any of the previous bubbles coming (very much like the cap'n of the Titanic). But now he's watching, listening, and waiting for that exact right time to withdraw the stimulus: that time when asset prices will stay where he wants them. Even he knows that will never happen.
May 28, 2013 3:41PM

When the warning flags become present, do we all sell at once, or do we wait a millisecond for the HFT algos to  take their 20% off the top first?

May 28, 2013 2:45PM
Don't you think the biggest Red Flag is the entire lack of economy and full reliance on Bernanke fiat infusions to give stocks any life at all? The moment he stops, your portfolio drops to zero. What would stop it?
May 28, 2013 3:36PM
So what were hearing today is that stocks could go up or stocks could go down, do you really need someone to tell you that. I wish I could get paid for that prediction.
May 28, 2013 3:50PM
It's all coming to a head. Japan is just about insolvent, the fed cannot continue to print unless hyperinflation is it's goal and the war drums are louder than ever. Why in hell is our biggest neocon senator in Syria talking to the rebels aka al ciada.  Another war is on the horizon and I sure hope we keep this one off our shores but I'm not sure we will. These so called terror attacks will get more prevalent.
May 28, 2013 7:39PM

Hey Skinger


I got out of the stock market in 2000, when the tech bubble starting going bust.


Put all of my money in precious metals and now it's worth 6 TIMES what it was then.


And guess what?


Even if the price of gold and silver goes back to 2000 levels, it will still be worth more than the useless bits of paper the government calls money..


And btw stocks CAN AND DO go down to ZERO

May 28, 2013 4:44PM
My impersonation of a MSN article commenter: Ahhh! The world is falling apart! Quick, sell your stocks and invest in gold and AK-47s. We're doomed!!!
May 28, 2013 10:48PM

Sure, stocks are up.  The govt is pumping printed money (QE) into the markets, which makes the dollar worth less, so of course, the perceived value seems higher. 



May 28, 2013 6:39PM

Buy from the fearful and sell to the euphoric.


I won't sell my stocks when you people tell me to. I'll sell my stocks when you people tell me not to.

May 28, 2013 4:30PM
Sounds like more head scratching to me. Careful you're gonna scratch right through that thick headed skin of yours. I noticed the expert commentators on MSN have lost most of their hair the past year.

May 28, 2013 6:22PM
Syria and McCain he wanted the USA declared a battle field??? What happens when countries that are still buying US bucks or bonds stop and return them ? because they are losing money on them. Watch the out come of BRICS summit in China this fall
May 29, 2013 7:59AM


I don't get your "Hucking seniors" comment. How does 'life is good' transition to that ? You got a belly full of sour grapes?


And for the record: My senior clients have some of the best performing portfolio's; Maybe you should move here to Florida and invest, learn to fish & relax  !

(It's never too late to learn to surf either)

May 28, 2013 3:40PM
Seems like a lot of people writing on this thread are sour grapes.  Did you maybe go to all cash at the market lows in 2008, thus locking in your losses?  Furthermore, did you maybe not have the gonads to pull the trigger prior to the stratospheric rise in the stock market since those 2008 lows?  Uh-oh.  Sucks to be you.
get out!  get out, Tom!  this thing's gonna blow!!!!
May 29, 2013 8:42AM

when real people can not find work (like now) the economy will fail.  the market is all on a false belief imposed by the government.  things are not good, and they are not getting better.  It is a trend that has been going on for a long long time,.... soon it will be time to pay the piper.


Hang on - stay honest and mind your morels..

May 28, 2013 10:17PM

When the curtain is finally pulled up on this Manipulated market...people will see nothing but a brick wall!

I think most people don't even have a clue on how bad they'll get slaughtered when this manipulated bubble pops!

It's going to happen first in overseas trading on a Sunday night..just like it did with the precious metals..

Then by the time the PANIC becomes obvious on Monday morning..Stock futures will already be down 1000 points... Of course by then all major markets will close down so that NOBODY can get their money.

Then while YOUR Money is held hostage....the Banksters will whip out the Cyprus template on you!    Good by Life Saving!

May 28, 2013 5:12PM
May 28, 2013 6:17PM
You are correct!!!!!!!!!!!!!!!   Life is good.
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