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
Yen spikes to 18-month peak, Amazon softens Apple blow
By Wayne Cole SYDNEY (Reuters) - The yen surged to an 18-month peak on Friday as investors wagered the Bank of Japan might be done adding fresh stimulus to the economy, hurting prospects for Japanese exporters with a move that rippled through share markets across the Asian region. Perhaps taking advantage of Japan's absence for a holiday, speculators smashed through the yen's previous top at 107.63 per dollar and drove the currency as far as 107.075. It had been at 111.67 before Thursday's decision by the BoJ not to ease policy further, even though prior media reports had set the market up for more action.
Graffiti at Utah's Arches National Park may be irreparable
(Reuters) - Graffiti etched into one of the popular red rock arches in Utah's Arches National Park may be too deep to be repaired, the park's superintendent said on Thursday. The site of the graffiti is near a hiking trail to one of the park's main attractions, Delicate Arch, a 64-feet high sandstone structure that has been known to draw hundreds of visitors at a time. Defacing a national park can lead to a sentence of six months in prison and a $500 fine, according to the website for the U.S. Department of Justice.
Wall Street sinks on BOJ fears, Icahn comments
The benchmark S&P 500 had its worst day in three weeks, losing 19.34 points, or 0.92 percent, to 2,075.81, the Dow Jones industrial average fell 210.79 points, or 1.17 percent, to 17,830.76 and the Nasdaq Composite dropped 57.85 points, or 1.19 percent, to 4,805.29. Wall Street dipped further late in the day, led by a decline in Apple stock. Shares of Apple, already suffering from disappointing earnings, took another hit after billionaire investor Carl Icahn said he no longer has a position.
US STOCKS-Wall St sinks on BOJ fears, Icahn comments
The benchmark S&P 500 had its worst day in three weeks, losing 19.34 points, or 0.92 percent, to 2,075.81, the Dow Jones industrial average fell 210.79 points, or 1.17 percent, to 17,830.76 and the Nasdaq Composite dropped 57.85 points, or 1.19 percent, to 4,805.29. Wall Street dipped further late in the day, led by a decline in Apple (LSE: 0R2V.L - news) stock. Shares (Berlin: DI6.BE - news) of Apple, already suffering from disappointing earnings, took another hit after billionaire investor Carl Icahn said he no longer has a position.
Death raises questions: Did Prince die of an overdose?
CHICAGO (AP) — Prince's final days and unexpected death at age 57 raise questions among experts familiar with prescription painkiller overdoses. It's possible the innovative musician's demise represents one of the most public tragedies in an overdose crisis now gripping America.
Laremy Tunsil slides in draft after bong video posted on Twitter
'Bomb' hooked to man in animal suit really flotation device
BALTIMORE (AP) — A young man in an animal costume and surgical mask who walked into a Baltimore TV station Thursday claiming to have a bomb was shot and wounded by police, who determined that his alleged explosive consisted of aluminum-wrapped chocolate bars duct-taped to a flotation device.
Vanuatu tsunami threat over after big quake: scientists
A major earthquake hit the Pacific nation of Vanuatu early Friday, briefly prompting a tsunami warning that was cancelled after locals reported no significant damage. The United States Geological Survey said the 7.0-magnitude quake -- originally reported as 7.3 -- struck at a relatively shallow depth of 35 kilometres (21 miles) some 209 kilometres from the capital Port Vila. The National Tsunami Warning Center (NTWC) initially warned the quake, which hit at 1933 Thursday GMT, could generate waves of up to three metres (10 feet) on parts of the Vanuatu coast.
TSX dips as financials drag; gold stocks rally
By Fergal Smith TORONTO (Reuters) - Canada's main stock index edged slightly lower on Thursday as losses for financials and other sectors offset gains for gold miners and Bombardier Inc after the company won a large plane order. The index has rallied 20 percent since January but has been unable to climb back above the 14,000 threshold. It moved back in reach of that level on Thursday before turning lower as losses on Wall Street deepened after the Bank of Japan's shocking call to cap monetary stimulus continued to rattle investors. The rally in gold and oil helped the index outperform U.S. ...
Carl Icahn says he sold entire Apple stake on China woes - CNBC
Billionaire activist investor Carl Icahn said Thursday he had sold his entire stake in Apple Inc , citing the risk of China's influence on the stock. Icahn, in an interview with cable television network CNBC, also said he was "still very cautious" on the U.S. stock market and there would be a "day of reckoning" unless there was some sort of fiscal stimulus. Icahn had been a huge cheerleader of Apple, acquiring a stake in the company almost three years ago, repeatedly calling the investment a "no brainer." In an open letter to Apple Chief Executive Officer Tim Cook in May 2015, Icahn had argued that shares of the iPhone maker were worth $240, about 90 percent more than they had been trading.