11 signs the U.S. stock market is facing a correction

The old adage – all good things come to an end – can easily be applied to Wall Street today.

The general consensus today is that the United States stock market is overvalued. With the Dow Jones posting record highs, unprofitable companies earning multi-billion-dollar initial public offerings (IPOs) and the Federal Reserve pumping money into the capital goods market, American stocks have been soaring since the economic collapse.

Many financial experts are presently fearing a correction. Just how big that correction will be is currently unknown. What we do know is that the equities market is overvalued and it can’t record significant gains in perpetuity.

Like any other bubble, there are those that believe a correction isn’t inevitable, and that this bull run, since it is different from previous ones, will last forever. However, there are numerous signs all over the market that suggest a correction is on its way.

Here are 11 signs that the U.S. stock market is on the verge of correction:

1. In February, the Fed’s money supply growth declined to a 17-month low.

2. Treasury Deposits at the Federal Reserve fell by 1.7 percent last month to $269 billion, which is helping to push down the money supply growth.

3. Earlier this month, the Fed raised rates for the second time in three months. Janet Yellen and Co. are expected to pull the trigger on at least two more rate hikes this year, and several more over the next two years. Since the central bank was printing money and suppressing interest rates, investors went into stocks, but now they may allocate their resources into fixed income investments.

4. Reports suggest that investors are purchasing safe haven assets again. One data point, for instance, found that money managers and hedge funds increased their net long positions in gold.

5. The Dow Jones Transport Index, which some financial professionals use an indicator for wider stock market movements in the U.S., has been tumbling as of late. In the last month, it has plunged more than seven percent.

6. The CBOE Volatility Index, otherwise known as the fear index, has been steadily climbing in March. When the index hits 20 then the market fears a decline in stocks. At the time of this writing, it stands at just under 13, and has cratered 11 percent year-to-date.

7. Last month, options bets suggested that the market would dip. Ostensibly, a growing number of investors are bracing for a massive selloff in the market.

8. According to the latest American Association of Individual Investors (AAII) weekly sentiment poll, respondents who have identified as bears stands at 39 percent, while the number of bulls sit at 31 percent. The last time the number of bulls exceeded 50 percent was in January 2015.

9. The National Association of Active Investment Managers (NAAIM) exposure index fell to 80.77 percent last week. The index has suffered a decline of more than 21 percent in two weeks, which is the biggest drop since May 2016.

10. There has been a selloff in bank stocks this year. The Financial Select Sector SPDR ETF lost more than four percent in February.

11. Corporate growth has stalled since late 2015. S&P 500 corporate earnings in the third quarter were down more than two percent. This is the sixth consecutive quarter of corporate earnings falling.

During the stock market crash of 1929, many investors were devastated because they used borrowed money to purchase shares in companies. Margin debt, which is the amount of money lent out for investment, is sitting near all-time highs, and this is dangerous. With the Fed raising rates, servicing this debt will be more expensive. With shares inevitably going to crash, many households could be wiped out.

The market is overvalued. It is difficult to dispute that. If you made a lot of money in the market in the last several years then perhaps now is the time to start gradually waning away from U.S. equities.

No one can correctly predict the exact date the Dow Jones will face a 10 percent correction. If they say they can they are telling a fib (and if they turned out to be right then they were lucky). But that doesn’t mean you shouldn’t be prepared for the correction, even if it is at the end of the year or at the end of the president’s first term.

With so much debt and credit expansion, this correction, and subsequent recession, will be vastly different.

AM

Like this article? Get ECN delivered to your inbox daily. Subscribe here.

Leave a Comment