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
Will an Upbeat Federal Reserve Burst the Market Bubble?
It's pretty clear by now just how dependent the global financial system is on the largesse of the world's central banks. The Federal Reserve, in particular, has taken on immense importance in the post-crisis world of ultra-low interest rates, aggressive stimulus measures and constant stock market activism. After all, fundamentals seem to matter less and less (witness the five-quarter long U.S. corporate earnings recession and stretched stock valuations) while stimulus matters more and more.
UBS sees more tough markets ahead after second quarter earnings beat
By Joshua Franklin ZURICH (Reuters) - Switzerland's biggest bank UBS on Friday cautioned that tough market conditions would likely continue for the foreseeable future as it posted a 14.5 percent year-on-year drop in second-quarter net profit. The world's largest wealth manager said net profit for the three months to June was 1.034 billion Swiss francs (801.69 million pounds), down from 1.2 billion francs a year ago on the back of lower earnings at its wealth management and investment banking businesses. "We achieved this strong result by helping our clients navigate continued difficult market conditions, while staying disciplined on risk and further reducing cost," Chief Executive Sergio Ermotti said in a statement.
Unconventional Diaries: Clinton’s grand finale
Goldman says oil's rebalancing remains fragile amid macro headwinds
The Wall Street bank, which turned bullish on oil earlier this year, said oil prices will remain in a $45 a barrel to $50 a barrel trading range through mid-2017, with near-term risks skewed to the downside due to high inventory levels and the possibility of a stronger dollar. "Beyond these near-term uncertainties, however, our updated supply-demand balance is little changed and still points to a slow rebalancing of the global oil market over the coming year," the U.S. bank said in a note dated Wednesday. Goldman said it viewed a rise in product inventories as a result of too much refining capacity and strong margins, not weak demand.
Clinton, Democrats turn the tables on GOP
Clinton seizes her moment at DNC
Chelsea shows a side of Hillary the public seldom sees
Father of fallen Muslim soldier rebukes Trump
'Star Trek' licensing helps boost CBS earnings
Shares of the media company slipped 0.02 percent to $54.20 in extended trading, after closing at $54.21 on the New York Stock Exchange. The company, which owns cable channel Showtime, radio stations and publishing house Simon & Schuster, said net income rose to $423 million, or 93 cents per share, in the second quarter ended June 30 from $332 million, or 67 cents per share, a year earlier. Analysts on average had expected 86 cents, according to Thomson Reuters I/B/E/S.
Alphabet posts strong revenue on video market, stock surges
Alphabet Inc , Google's parent, on Thursday revealed that efforts to push its vast advertising business toward mobile is paying off as second quarter earnings handily beat Wall Street's expectations. The results put to rest lingering concerns about how the rise of mobile might impact Google, which has a strong mobile presence with its Android smartphone operating system but has long relied on desktop search traffic to power its profits. Advertisers typically pay less for user clicks on mobile ads than on desktop ads, Google's traditional strength, but the strong earnings performance suggests that is beginning to change, said Colin Gillis, an analyst with BGC Partners.