The 7 Signs of a Dying Bull

This aging, seven-year bull market is staggering into the final month of 2016 on wobbly legs. How long before it collapses and dies?

Born in early 2009 amid the rubble of the Great Recession, the current market upswing is the second longest in U.S. history, surpassing the streak that lasted from 1949 to 1956.

Many analysts are now calling for an imminent correction. In fact, the Royal Bank of Scotland (OTC: RBSPF) this year provided investors with disturbing advice: “Sell everything.” The widely followed strategists at RBS advised investors to run — not walk — for the exits.

If RBS and other bearish analysts are correct, several fundamentally flawed but overvalued stocks are on the verge of steep declines. To prevent getting blindsided, you need to know the trouble signs ahead of time.

Here are seven key indicators that can help you determine whether the bull still has momentum or is losing steam.

Below, we also unveil a proprietary trading system that doesn’t care what happens to the bull market: it makes money in good times and bad. But first, let’s look at the seven hallmarks of a dying bull and pinpoint those that now apply.

1) Extremely high trading volume and volatility.

The markets have certainly witnessed high volume and extraordinary volatility this year, with more in the cards.

Linda McDonough, chief investment strategist of Profit Catalyst Alert, sees volatility continuing into 2017. With Republicans in control of Congress and the White House, a flurry of new legislation could prove disconcerting to traders.

“This easier path to legislation plus the lack of detail regarding Trump’s proposals will keep the markets jumpy over the next 12-24 months,” McDonough asserts.

Igor Greenwald, chief investment strategist of MLP Profits and managing editor of The Energy Strategist, also expects continued volatility and uncertainty, which will drive up energy prices.

Come next spring, the U.S. could be in a tense standoff with Iran in the Gulf, with Iranian oil exports fading and Iranian responses increasingly provocative. If Saudi Arabia curbs its output as well we could be looking at significantly higher oil prices,” Greenwald says.

2) Valuations are off the charts.

It’s a warning bell when valuations are at historical extremes. While stocks typically have a trailing price-to-earnings ratio (P/E) of 15, they now hover at a trailing P/E of about 25. That means stocks are priced nearly 67% higher than their 10-year average.

Valuations also are high in terms of book values and corporate earnings. You should be especially worried about the long losing streak of disappointing quarterly operating results from S&P 500 companies. Although the earnings recession showed signs of easing in the third quarter, expected profits remain out of whack with high valuations.

3) Bad breadth.

No, I’m not referring to halitosis. A sign of a market peak is when fewer and fewer stocks are participating in the upswing.

A key indicator of breadth is the NYSE Advance/Decline Line (ADL), which measures the cumulative sum of the daily difference between the number of issues advancing and the number of issues declining in the NYSE. If the ADL is declining, it tells us that a minority of companies is driving overall market performance.

It’s a red flag if the ADL has peaked and is now declining, even though the S&P 500 and Dow Jones Industrial Average continue higher. This dynamic indicates that even though the selective market indices are rising, the much broader market is foundering.

The bad news: an increasing number of analysts are expressing bearish concern that equity breadth has been declining over the past couple of months.

4) The Fed is tightening the monetary spigot.

When the Federal Reserve increases interest rates and squeezes credit, it causes money supply growth to nosedive — an unmistakable sign that the stock market will soon stall. An increasing money supply boosts stocks; decreasing money supply puts the brakes on stocks.

With the Federal Reserve poised to raise rates next month, should you be worried? Not necessarily. Analysts have endlessly discussed the inevitability of tightening and the markets seem braced for it. The fallout should be modest.

5) The market leaders falter and become laggards, while the laggards become the new leaders.

Bull runs often are propelled by a relatively small number of strong stocks that are “market leaders.” When these stocks begin to decline, it could mean that the rest of the troops will follow.

Indeed, markets did a 180-degree switcheroo halfway through 2016, with the leaders of the first half turning into laggards as the year progressed. In particular, the utilities, telecommunications and real estate sectors went from positive to negative territory, as greed replaced caution. First-half laggards such as technology and financial services are now in the vanguard.

6) Imminent government intervention.

President-elect Donald Trump has promised a highly active “first 100 days,” as the Republican party pushes through its long-deferred wish list of legislation: massive tax cuts, repeal of Obamacare, the gutting of Dodd-Frank, and severe Medicare cutbacks, among other conservative priorities.

If the normally slow-to-act Congress is actually addressing a perceived problem in the economy, it usually means that there’s an imbalance somewhere that is waiting to trip up the market. And besides, the financial community tends to be leery of government activism of any kind, even when it ostensibly benefits traders and corporations. Trump’s first few months in office will likely unnerve Wall Street.

7) Overwhelmingly bullish consensus among analysts and advisors.

The unexpected “Trump bump” in equities following the election has prompted a lot of euphoric talk on CNBC and elsewhere about a lasting rally due to the new president’s pro-business agenda. But it’s usually a bad sign when the talking heads are giddy.

Don’t succumb to “group think.” When analysts are all caught up in the bullish euphoria, it’s time to get cautious.

Trump will hit many speed bumps, even in the Republican Congress. Already, his promised infrastructure spending package is getting push-back from GOP leaders who are insisting on commensurate spending cuts. What’s more, it’s coming to light that much of this promised infrastructure spending will be in the form of tax breaks for privatized construction projects, funneled to (you guessed it) companies that do business with Trump. The much-anticipated stimulus of a Trump regime could prove a mirage.

The takeaway: The post-election run-up in equity prices could be a sucker’s rally that’s due for a day of reckoning. When choosing investments, stick to quality. There’s a natural allure to “up” markets, but the intoxicating effects of a bull market are not related to your need to have money rationally invested and allocated according to specific goals.

The TINA syndrome…

I got this letter from a reader, who raises an interesting point:

“I find your comments very helpful. However, when comments are made about the market at 20 or 25 times earnings and related to 10 years ago, it must be noted where bond or bank rates were at those years. When short rates are zero or darn close at present versus 5% to 6% in those years, the comparisons don’t relate.” — Jack B.

Jack’s right. With short rates still at historic lows, stock valuations must be placed in the context of the overall risk-to-reward ratio and alternative investments. Why do traders continue piling into expensive stocks? I call it the TINA syndrome: There Is No Alternative.

Got a question or comment? Drop me a line: — John Persinos

Staggering profits, in bull or bear markets…

As I’ve just explained, most signs point to a coming bear market, but you needn’t panic.

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