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.
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US stocks slip a day after Nasdaq passes 5,000 milestone
NEW YORK (AP) — U.S. stock indexes edged lower in early trading Tuesday as investors await earnings from the few companies yet to announce results and a jobs report later this week. The Nasdaq fell below 5,000 a day after passing that milestone for the first time since the dot-com era 15 years ago.
Wall St slips from latest records; Nasdaq below 5,000
By Chuck Mikolajczak NEW YORK (Reuters) - U.S. stocks edged lower shortly after the open on Tuesday in the wake of the latest records for the Dow and S&P and the Nasdaq scaling the 5,000 mark for the first time in 15 years. The Nasdaq had notched its first close above the 5,000 milestone since March 10, 2000, buoyed by merger activity, for only the third close above that level in the history of the index. "The market is naturally settling in, taking a breather until the scales tip either way to commence the next move to continued to new heights or a consolidated pullback," said Andre Bakhos, managing director at Janlyn Capital LLC in Bernardsville, New Jersey.
US STOCKS-Wall St slips from latest records; Nasdaq below 5,000
U.S. stocks edged lower shortly after the open on Tuesday in the wake of the latest records for the Dow and S&P and the Nasdaq scaling the 5,000 mark for the first time in 15 years. The Nasdaq had notched ...
US stocks ease in early trading, Nasdaq below 5,000 points
NEW YORK (AP) — U.S. stocks are opening slightly lower, pulling the Nasdaq composite back below 5,000 points.
US STOCKS-Wall St to dip at open after latest records, Nasdaq 5,000
U.S. stocks were set for a modestly lower open on Tuesday, after the Dow and S&P marched to new record highs and the Nasdaq topped the 5,000 mark for the first time in 15 years. The Nasdaq notched its first close above the 5,000 milestone since March 10, 2000, buoyed by merger activity, for only the third close above that level in the history of the index.
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