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The Stock Market Will Take You Down Without Any Notice

April 16th, 2013

ben bernanke: This market is on steroids. The Federal Reserve is the dealer and the market participants are the buyers. This is a particularly dangerous stock market risk.

So it’s not a surprise to see stocks go up and up without any signs of a pending correction. You really want to see a market adjustment, especially during a bull market rally.

Yet the fact is that the market is pushing higher to new records, and I see stock market risk.


Enjoy the ride, but don’t get too comfortable, as I still feel a market correction and stock market risk are on the horizon, especially if you believe that the best six-month period for market gains is ending in two weeks. (Read “Why You’ll Want to Spend More Time Gardening, Less Time Stock-Picking This May.”)

I would also advise you to be careful, given the light volume we have been seeing, which creates a negative divergence between rising stock prices and lower volume, based on my technical analysis, along with stock market risk.

And as the market continues upward, it seems like everyone is latching on for the ride. Investors dangerously drop their guard and, like a boxer, are opening up themselves to some vulnerability and stock market risk.

Take a look at the CBOE Volatility Index (VIX)—also widely known as the “fear factor” of the market—based on the S&P 500.

The VIX reading is currently quite low, sitting just above 12, and as shown on the chart, the current stance is well below some of the high readings since 1990.

$VIX Volatility Index New Methodology stock chart

Chart courtesy of www.StockCharts.com

What the low VIX implies is that investors are overly relaxed and evidently not at all concerned about the current market climate and stock market risk.

Yes, there’s still risk in the world.

Think about the eurozone, North Korea, China, and even here in America, with the dangerous flow of easy money and mounting national debt, which adds to the stock market risk.

Take a glance at the chart below that shows the steady rise and flow of the M2 money supply since 2003. Talk about money printing! (The M2 money supply accounts for all money in circulation plus short-term deposits and money market funds.)

Thank the Fed for pumping up the economy and market. The chart shows that as money supply rises, so does the S&P 500, as shown by the green line in the chart below. Since 2009, as the M2 money supply steadily rises, look at the S&P 500 to move in near perfect correlation.

You kind of wonder what could happen if the M2 money supply begins to move lower.

$$M2 M2 Money Supply INDX stock market chart

Chart courtesy of www.StockCharts.com

The chart below shows the impressive move of the S&P 500 stocks. At this juncture, close to 92% of the S&P 500 stocks are above their 50- and 200-day moving averages (MAs), as shown by the blue oval in the chart. The current breakout was also accompanied by rising relative strength.

$SPXA200R S&P 500 percent of stocks above 200 day moving average stock chart

Chart courtesy of www.StockCharts.com

You need to be alert, as investor mistakes occur when there’s too much confidence and stock market risk is pushed aside.

But the reality is that the market doesn’t care; it will take you down without any notice.

This article is brought to you courtesy of George Leong from Profit Confidential.


NYSE:DIA, NYSE:VXX


 

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  1. April 16th, 2013 at 13:54 | #1

    I agree & disagree.
    Nice analysis and charts by the way, but as far as the market not “giving any notice”…I think there has been plenty of “notice” given by some quality leading indicators: 1) market breadth is deteriorating; 2) copper and oil crunch [see JJC and USO]; 3) earnings [see AA, ORCL, FDX, CAT charts - big gaps down or obvious broken trends].
    So, I agree and appreciate your article, but if people dig deeper, there are plenty of warning signs!

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