3 Signs the U.S. Market is Approaching Danger Zone

A recent article by Claus Vogt of Money and Markets highlights three danger signs that a crash in the U.S. market may be approaching. I'll summarize below.

Danger Sign 1:

A Major New Debt Crisis Striking Thousands of Local Governments Throughout the United States

To highlight a section from the article, Mr. V states that,

"In prior debt crises, a major central government or bank came to the rescue. This time:

• The Federal Reserve has neither the authority nor the will to come to the rescue; and
• The U.S. Congress is even less inclined to open the Pandora's box that a city or state bailout would involve.

... This one is striking at the very heart of the U.S. economy!

Result: A big threat to the U.S. GDP growth in the second quarter AND to the U.S. credit markets at the same time."

Danger Sign 2:

A Major Divergence in the Stock Market

A key indicator pointed out is "the number of stocks hitting 52-week highs.

• During a healthy, durable bull market, as the major indices move to new highs, there should be an increase in the number of stocks making new highs, as growing number of issues participate. And for the rally to continue, stocks must repeatedly hit new cyclical highs. But ... 
• At the tail end of the bull market, this picture starts to change. The breadth of the move weakens. More and more stocks enter topping formations or start to roll over. And the number of stocks making 52-week highs levels off or actually declines.

...Although the broad indices are still making new highs, fewer stocks are doing so. In other words...

The whole rally depends on a shrinking number of stocks!"

The "negative divergence" is obvious from the evidence presented in the two charts below:

To quote, "As you can see the current move to new index highs is not confirmed by the number of 52-week highs...

The indicator's high for the current cycle was way back in April 2010. So the market is actually showing multiple divergences: A succession of higher highs in the index and ... at the same time ... a succession of lower highs in this indicator...

...the number of 52-week highs is a time honoured indicator. Historically, it has given important warning signs well before a major bear market commenced. Just look at 2007 and you'll see an example of a negative divergence similar to the one we're experiencing now!" 

Danger Sign 3:

Great Overvaluation

This line says it all. 

"The U.S. stock market is severely overvalued ... possibly by 50% or more!"

Put the three signs together and it's wise to invest with caution in the year ahead. What's that latin saying again? Oh yes...

Caveat Emptor,

~K

P.S. If you're interested in the complete article, it can be found here.