There's no question that the rally we've seen in markets up to this point in the year has been impressive. Through the end of last week, the S&P 500 was up almost 9 percent and we're not even through two full months of 2012!
The rally has been fueled by ultra-accommodative measures taken by the world's central banks along with better than expected economic numbers here in the U.S. and in Europe.
|Mainstream media is helping fuel investor complacency.|
Surprisingly, given the rough year of 2011, I almost sense some complacency in the markets, as evidenced by recent consumer confidence numbers hitting one-year highs, and a Barron's cover calling for Dow 15,000.
Savvy contrarian investors, however, know to look beyond the headlines and past the major averages for clues as to the market's next moves.
And when we look past the impressive performance of the S&P year to date, we can see some leading indicators that warrant a level of concern ...
The first is the Dow Transportation Index. This index tends to rally before the rest of the market turns up, and it falls before a general market decline.
The reason for this is quite logical: The Dow Transports, as they are known on the Street, is made up of companies like Fed Ex, UPS, and others that are on the leading edge of the economy. When the economy is growing, their stocks do very well because businesses are shipping goods around the world. And when the economy is contracting, these companies are the first to feel it.
It's a bit concerning then that the Dow Transportation Index did notconfirm the new high we saw in the general market a little over a week ago. This divergence between the two indices has historically been a warning sign that the market may not be as healthy as everyone thinks.
The second leading indicator is the small cap sector. The Russell 2000 has also shown some relative weakness here, stalling while the larger cap indices like the Dow and S&P have made new highs. You can easily see the divergence in the chart below.
Small cap companies, like the transportation sector, are very economically sensitive. And they can fall, or pause first, before the rest of the market heads south.
Professional traders often look at the "internals" of a market, not just the bigger averages, for clues into the future direction. And these two internal indicators are throwing up a caution flag.
But just because the market seems poised to take a header doesn't mean you have to sit on the sidelines and watch the life getting sucked out of your portfolio ...
Inverse ETFs with exposure to these leading sectors of the economy, such as the ProShares Ultra Short Russell 2000 Growth ETF (SKK), can be a good hedge to existing long positions you may have. Or you could consider them as investments to profit from a correction.
Another idea is investments that are out of favor, or that the crowd hasn't caught wind of yet.
|< Prev||Next >|
Current Headlines - Finance
Pipeline explosion halts gas supplies to southern China: Xinhua
26 May 2013 | 12:50 am
A section of a cross-country gas pipeline in China exploded on Sunday, injuring at least two people and halting gas supplies, local media said.
Report: New controversy at scandal-scarred Rutgers
26 May 2013 | 12:49 am
The woman hired to clean up Rutgers' scandal-scarred athletic program quit as Tennessee's women's volleyball coach 16 years ago after her players submitted a letter complaining she ruled through humiliation, fear and emotional abuse, The Star-Ledger reported Saturday night on its website.
2 rockets hit Lebanese Hezbollah stronghold
26 May 2013 | 12:41 am
Lebanese security officials say two rockets have slammed into a Beirut neighborhood that is a Hezbollah stronghold, wounding 3 people.
Search for pilot in deadly NY Angel Flight ongoing
25 May 2013 | 11:04 pm
San Antonio flooding kills 2; 200-plus rescued
25 May 2013 | 10:23 pm
PM asks SEBI to take steps to eliminate stock market insider trading
24 May 2013 | 10:40 pm
Mumbai, May 25 (ANI): Prime Minister Dr. Manmohan Singh has asked market regulator Securities Exchange Board of India (SEBI)to root out the disease of insider trading from stock markets.
Wall St Week Ahead: Investors look for signs in the rally's break
24 May 2013 | 6:53 pm
By Caroline Valetkevitch NEW YORK (Reuters) - The U.S. stock market's break in its recent rally this week left investors wondering if they're seeing a turning point or just a blip in the upward path. Next week could make it harder to figure out, considering that the long Memorial Day weekend typically signals the start of the summer. The three major U.S. stock indexes posted a decline for the week on Friday, their first weekly loss since mid-April, raising some fresh worries that this year's rally may be weakening. ...
Billionaire investor apologizes for saying women traders inferior
24 May 2013 | 5:45 pm
REUTERS - Billionaire investor Paul Tudor Jones, who riled both Wall Street and Main Street when he said that women will never quite rival men in investing or trading, apologized on Friday, noting that he has encouraged his daughters to pursue careers on Wall Street. "Much of my adult life has been spent fighting for equal opportunity, and the idea that I would support limiting opportunity for any segment of society, particularly women, is antithetical to who I am and what I have done," Jones, who runs the $13 billion Tudor Investment Corp, said in a statement. ...
Summary Box: Stocks little changed, end week down
24 May 2013 | 4:52 pm
WEEKLY LOSS: Major stock indexes ended the week lower for the first time since the week ending April 19. A disappointing manufacturing report out of China and a sharp fall in Japan's stock market rattled ...
Metals and agricultural futures prices slip
24 May 2013 | 4:28 pm
Metals prices ended slightly lower Friday, as did agricultural futures. Crude oil ended the week down 2 percent as traders worried about global demand and shared the stock market's concerns about possible ...
- Don't miss the next secular bull market
- Railroads to new oil boom
- Another way to invest in emerging markets
- An Unexpected Beneficiary of a Recovering Housing Market
- Global Currency War: Unique Opportunities in The Pacific Theater
- Israel develops the next generation operating room
- Turmoil in Venezuela Could Spell Opportunity for You
- The way to be healthy, happy, and full of energy that works
- Turning points coming soon, market action set to heat up, lots of trading opportunities ahead
- Male Logic ...