The stock market broke below key price support at its 50-day
moving average Monday, further confirming the market's march
"For some reason, weakness invades equity markets in the
months of September and October, and this year looks like it may
happen again," Mark Arbeter, chief technical strategist at
S&P Capital IQ, wrote in his weekly research note.
"Fortunately for the bulls, we do not see a major topping
formation from which prices could cascade into a major bear
market. Major correction, maybe, but we see the bull extending
Although so far the pullback appears mild, Arbeter and other
market strategists are bracing for a deeper correction. Here are
five major reasons why.
1. Investor sentiment readings are overwhelmingly bullish,
which is bearish from a contrarian point of view.
The 30-day CBOE put/call ratio tumbled to its lowest level
since May 2011 last week, indicating options traders -- who are
usually wrong -- are overwhelmingly betting on higher prices.
In addition, "the percentage of bears on the Investors
Intelligence survey fell to 18.5% last week, the fewest since May
2011, which was not a good time to be in the market," Arbeter
Barron's "Big Money Poll" of
showed that bullishness hit a new record, the "Lamensdorf Market
Time Report" stated Monday. About three quarters of survey
respondents said they're bullish or very bullish on U.S.
"As contrarians, we at LMTR see this as a clear warning sign,"
the Lamensdorf report stated.
2. Margin debt on the New York Stock Exchange is waning.
"Many times, when margin debt rolls over, stocks follow to the
downside," Arbeter wrote in his weekly research note.
Margin debt is even higher than at the 2007 peak, according to
the Lamensdorf report.
3. The NYSE advance/decline line failed to confirm the
recent highs in the S&P 500.
"New 52-week highs on the NYSE also failed to confirm the
price highs on the S&P 500," Arbeter wrote.
4. By some measures stocks are overvalued.
The Shiller Price Earnings Ratio shows the market is currently
trading at 24.5 times earnings vs. a historic average of 16.5.
Shiller's calculation divides stock prices by their
inflation-adjusted average earnings over the past 10 years in an
effort to get a more accurate reading of stock valuations.
"The typical peak outside of the extreme dot-com bubble comes
at a P/E of 26," the H.S. Dent Forecast released Thursday states.
"The most extreme reading was 42 in early 2000 -- a once in a
lifetime occurrence -- and then 32 in late 1929. But the 2007 top
saw a reading of 27 and the 1965 top saw 25."
5. The current bull market has been going on much longer than
When excluding extreme cases, the average bull market lasts
3.7 years, according to H.S. Dent. The current bull market is 4.4
years old. Dent projects the Dow to rise to 16,000-16,100 by
around January 2014 and the S&P 500 will see 1740-1750 and
then fall into a correction.
"Broader investors should sell stocks if we see the Dow hit
16,000 after another significant correction," the H.S. Dent
Forecast stated. "The greatest danger period for a crash to begin
will be late January to late April. If we don't see turbulence by
then, I'll reconsider being out of stocks."
Major ETF Performance Monday
SPDR S&P 500
) fell 0.64% Monday. It has corrected 3% from its 52-week high
from Aug. 2.
PowerShares QQQ (
), tracking the 100 largest nonfinancial stocks on the Nasdaq,
shed 0.18%. It still above its 50-day moving average and has
corrected only 2% from its peak.
SPDR Dow Jones Industrial Average (
), the weakest among the three, lost 0.5%. It broke below it
50-day line Wednesday and trades 4% below its apex.
IShares MSCI EAFE (
), tracking foreign developed markets, shed 0.71%.
IShares MSCI Emerging Markets (
) gapped down 1.8%. It's been in a downtrend since the year began
and trades below both the 50- and 200-day moving averages,
indicating severe weakness.
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