Tuesday, 14 December 2010

STOCKS: Iceberg dead ahead

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There are now so many signals calling for a top in the stock market it's hard to know where to begin...

Rather than assault you with a whole battery of charts, this one might suffice.  It shows the number of net New 52-week Highs, an indicator of market breadth (breadth is a measure of how individual stocks within an index are actually contributing to its performance, see chart for details).  

The indicator has fired off a sell signal 23 times over the past fifteen years. 

Of these, 17 led to an immediate correction of some significance - 8% at least, plus those which pinpointed the two major peaks of the past decade.  Most declines began within a couple of weeks.  5 further signals appeared somewhat early (by a month or two) but still flagged up a significant correction.  

Just one, in the summer of 2003, failed to signal real trouble ahead (although see chart).

Given the euphoria shown in objective investor sentiment measures of every kind - indeed there is a new consensus quite evident from watching the TV business networks that the US economy is out of the woods - the conditions for a correction of some significance are certainly present.

I suspect we may be at an interim exhaustion point before a subsequent major top - the Fed's QE2 shenanigans are designed to push markets higher well into next year - but it is conceivable that we are at the actual top itself.  

Whichever, if you are wondering whether or not to invest in stocks, the risks of doing so now should be plain to see.


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