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Thursday, February 21, 2013

Seven warning signs say stocks are about to slide

According to Marketwatch:

1. Newsletter craze : As technical analyst J.C. Parets of All Star Charts points out, newsletter writers are recommending record exposure to equities. The last time they were this bullish? Late 2007 and early 2008. Oops. But that doesn’t mean that J.C. is a bear — rather, he says, “I have more buying to do anyway. Let's correct already and be done with it. The suspense is killing me.”
2. Options activity: Surly Trader over at Pragmatic Capitalism has a great post on the Credit Suisse “Fear Barometer” of options activity. But in a nutshell, the measure is near an all-time high thanks to low demand from call buyers, a high supply of call sellers and high demand for protective puts. Check out the full post for details.
3. Good news drought : Kicking off the first day of trading this week, Paul Vigna of theWSJ MarketBeat blog said it best:
“Unless something pops up from unexpected corners, it’s hard to see what’s going to give traders much momentum this week. There’s nothing top-tier — a couple of housing readings, producer and consumer prices for January, weekly jobless claims — on the data calendar.”
With most of earnings behind us and the ugly sequester fight ahead, there aren’t many headline events that could move the market higher. Next week also looks rather ho-hum, with a fourth-quarter 2012 GDP update and some consumer data, but it seems unlikely either will come in tremendously positive.
4. Aren’t you already in?: Ari Wald of PrinceRidge pointed out last week what should be obvious after the Apple AAPL -1.00%   meltdown: When buyers have already bought in, that’s when momentum wanes and sentiment swings the other way.
In his words, “When fewer longs are left to propel stocks higher, the market’s rate of ascent subsequently declines and price will generally level off. Then as supply and demand come into balance, a small disturbance can be intensified by a negative feedback loop and initiate this circuit in the opposite direction.” In other words, few buyers mean little upside and big downside risk. (Hat tip to Josh Brown of The Reformed Broker for sharing.)
5. Complacency creep: Adam Shell of USA Today posted a feature recently with a nifty graphic that details declining volatility in the market. But buried in this piece there is a good quote from Bob Doll, chief equity strategist at Nuveen Asset Management, in regards to relative market stability: "That does not mean some short-term complacency hasn't crept into the market. It probably has."
Complacency is not optimism.
6. Outright pessimism : This Reuters article takes that previous statement one step further with telling quotes from two Wall Street veterans.
Bruce Zaro of Delta Global Asset Management said, "I do suspect the closing of the earnings season will lead to at least a pause and possibly a pullback [of 3%-5%]. Separately, Dave Chojnacki of Street One Financial said, “We just don't have the volume or the catalyst right now” to break through upside resistance. These two guys are clearly much more than just complacent.
7. Consolidation is natural : Blogger Dynamic Hedge is representative of many market watchers. He remains long-term bullish and thinks we have yet to see the high point of the market in 2013.
But he is quick to note that “markets are a two-way street and we know that they will trade lower at some point. The question is when, and from what level. A pullback should be viewed as a positive development.”
There are many terms for this —  back and fill, consolidation, stabilization — but the general idea is that we hit a resistance point where sellers take profits for a while until the buyers regain support.
To be clear, a pullback is not a crash. Long-term investors probably don’t have too much to fear, since most economists believe 2013 will be better for U.S. growth than 2012 — and that next year will be better than 2013.
But its seems clear that both the bulls and the bears agree we are bumping against a ceiling.

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