Why the Correction That Never Comes May be Getting Closer

The S&P 500 notched yet another record closing high last week above 2,510. And stocks continued their climb during Monday’s trading session — even after several startling, fatal events this past weekend …

A mass shooting in Las Vegas became the deadliest in U.S. history … chaos in Catalonia erupted when its citizens voted overwhelmingly to leave Spain … and terror investigations were launched after attacks in Marseille, France, and Edmonton, Canada.

It seems nothing can knock a good bull down. But if you look closely, this one appears to be running out of breadth. (No, that’s not a typo, as you’ll see in a moment.)

Today we’ll look at how this, and two other, flags could signal an overdue market correction. One that would consequently provide us with a great buying opportunity. 

But first, let’s recap just how far this bull has run …

The bull market that began in March 2009 is now the second-longest AND the second-strongest bull market of all time. (In price appreciation; third-best in total return, dividends included.)

The bulls have been running on Wall Street for 3,121 days, and counting. Over that period, the S&P 500 Total Return Index is up nearly 350%, overtaking the 1949-’56 bull market as the second-best.

But as much as everyone likes seeing their stocks go up, this has likewise been one of the “most hated” bull markets in history.

How do we know? Because that’s what investors are saying about it!

According to survey data from the American Association of Individual Investors, bullish sentiment pulled back sharply again last week, to just 33.3%.

That’s the largest one-week decline in sentiment since May. In fact, bullish investor sentiment has been in the minority — below 50% — for a record 143-straight weeks!

And it’s easy to see why. There are so many investors waiting on the sidelines, in frustration, for a correction that never comes as the stock market melt-up continues.

In fact, it has been nearly 600 days since the stock market last experienced a 10%+ correction, way back in February 2016.

There are few things more certain in financial markets than the principle of regression to the mean, which simply states: What goes up must (eventually) come down. Markets swing to-and-fro like a pendulum.

And in my own experience of nearly 30 years in this business: The more extreme the swing in one direction … the more severe the counter-swing in the opposite direction. You can count on it.

And please note: 600 days without a 10% market correction is extreme … in the extreme.

Based on the historical record, you can expect a 10% correction about once or twice a year. But it’s been nearly two years now without one. To say we’re overdue is to put it mildly.

Here are three red flags I’m watching right now that could signal a coming correction. You should keep an eye on these indicators, too …

Red Flag #1 — Volatility: The CBOE Market Volatility Index (VIX) fell to record lows in July, ticked above 15 in mid-August, but dove below 10 again last week. That’s a sign of excess complacency in markets. Likewise, a similar measure of bond market volatility is also on the rise.

Markets often experience several spikes in volatility leading up to a sharp correction. Consider this: The Nasdaq declined more than 10% no fewer than six times within a 12-month stretch just before the tech bubble finally burst in 2000!

So keep an eye on VIX. That’s because rising market instability is a sure sign of a correction ahead …

Red Flag #2 — Bad Breadth: Even as the S&P 500 marches to new record highs, fewer rank-and-file stocks are participating. In fact, less than 60% of S&P 500 stocks are trading above their 10-day moving average. That’s down from more than 80% above the moving average on Sept. 1!

In other words, fewer and fewer stocks are trending higher along with the index. And more are rolling over well below new highs.

Even worse, take a look at the Nasdaq. There, nearly 40% of all stocks are trading below their 200-day moving average right now. (The 200-day moving average is the widely followed benchmark between a bullish or bearish trend.)

Think about that: Two out of every five Nasdaq-listed stocks are already in their own private bear markets today!

And don’t look now, but the high-flying FAANG stocks are finally beginning to falter!

Related story: Got Your Fill of FANG Stocks? Go to ‘BAT’ Instead

Red Flag #3 — Credit: Stock and bond market corrections are frequently preceded by a tightening of credit conditions. So keep a watchful eye on interest rates, as the Fed seems hellbent on more rate hikes.

U.S. Treasury yields rose 2 full percentage points in 1999, just before the Tech Wreck in 2000. And more recently, long-dated Treasury yields have risen steadily since Sept. 1.

Even more vulnerable are junk bonds, and there are a record number in circulation today. Global issuance of high-yield bonds so far in 2017 is running at an annualized rate of nearly $500 billion. That’s an all-time high.

If junk bond prices start to plunge, it’s a sure sign credit conditions are tightening … and a stock market swoon won’t be far behind.

Bottom line: There are plenty of signs of excess valuation on Wall Street today. While not at “irrational exuberance” levels just yet, valuations are uncomfortably high from a historical perspective. That leaves investors little margin for error.

Plus, we’re long overdue for a healthy pullback, which would likely be a great buying opportunity.

In the meantime, here’s what you can do …

1. Keep an eye out for these three red flags to signal a possible correction, and take defensive actions accordingly.

2. Consider raising some cash that will give you dry powder to put back to work when the bull reasserts itself and the melt-up continues.

3. RSVP by midnight tomorrow for a special Q&A with Edelson Institute founder Martin Weiss and cycles expert Sean Brodrick: “Raw, Uncut and Uncensored.” On Wednesday at 2 p.m. Eastern, they will reveal two major situations that require your attention right now that can affect your money … and your life.

Plus, they will give you their forecast for bonds, stocks, gold and silver … plus their strategy for multiplying your money many times over the next five years. They will even reveal the specific investments you’ll want to own not just during a pullback, but as crisis situations start to spiral out of control.

This Q&A session is 100% free to attend. But you must be registered to be admitted. Click this link to reserve your place NOW!

Good investing,
Mike Burnick

Leave a Reply

Your email address will not be published. Required fields are marked *

Comments 2

  1. H. Craig Bradley October 2, 2017

    MARKET REVERSALS OUTSMART INVESTORS AND TRADERS

    Whatever the trend, or whatever the market, strong reversals lasting for many months can sucker investors into committing money or not while waiting for a change in trend. When the reversal comes, most are unprepared for it and do not see it coming.

    It can be a reversal in the U.S. Dollar, as has been the case this year, or in the stock market (Index) or specific sectors (Energy). The primary problem in either case is a matter of timing (execution), as always and the reality few investors will get the timing right, be it professional or retail. Predicting and timing buys or sells is a “Holy Grail” in itself for the majority. There are many competing strategies for building wealth and the best of them often take years and plenty of patience. Buy good companies at FAIR prices and hold long term. There are no shortcuts that adequately compensate for time. Pays your money and takes your chances. Get Rich Fast programs or investing is a mirage and hurts investors much more than it helps them.

    Reply

  2. James October 3, 2017

    What I am interested is in dividends and free cash flow. Per share dividends are maintained even if earnings fall from one year to the next unless the company is facing serious financial problems. A pattern of constant growth in dividends per share relative to earning volatility is a good thing in this prosperity, recession, depression, and improvements jugular cycle that we are in. Its a jugular cycle because its a 15 to 20 year cycle in which booms should last for 3 to 4 years. Its not a Kuznets cycle because that’s a fixed short term investment cycle of 7 to 11 years. In 2000 we had dot.com burst, in 2008 we had the mortgage crisis, house crisis. We are working safely back towards a boom again in this boom, recession, depression, recovery and growth cycle. We are not a kondratieff cycle of 45 to 60 years, that’s more of a cycle linked to wars and civil unrest. How big this boom is gonna be is anyone’s guess? It could be bigger than the last boom. The last boom was the sweetest boom ever, a boom sweeter than any boom before or since. But booms come along their natural events such as natural disasters such as floods and hurricanes and tornadoes. Hopefully this winter will be a mild winter. We are all just human beings in a circle of life. Inverse etfs and low risk securities in the form of treasury bills, t-bills, are what to get into. We are in for a boom. So enjoy the ride.

    Reply