5 Signals That Confirm Stock Sell-Off Is Under Way

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The stock market broke below key price support at its 50-day moving average Monday, further confirming the market's march south.

"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 into 2014."

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 wrote.

Barron's "Big Money Poll" of professional investors 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. stocks.

"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 usual.

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 ( SPY ) fell 0.64% Monday. It has corrected 3% from its 52-week high from Aug. 2.

PowerShares QQQ ( 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 ( DIA ), 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 ( EFA ), tracking foreign developed markets, shed 0.71%.

IShares MSCI Emerging Markets ( EEM ) 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.

Follow Trang Ho on Twitter @IBD_THO .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: DIA , EEM , EFA , QQQ , SPY

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