What are the signs of a stock market top?
Nasdaq, S&P 500, Dow all slump
Tech down most among S&P sectors; real estate biggest gainer
Dollar, crude down; gold up; bitcoin up >5%
US Treasury 10-year yield down at ~4.24%
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WHAT ARE THE SIGNS OF A STOCK MARKET TOP?
As stocks continue to climb to new highs, Nicholas Colas, co-founder of DataTrek Research has assembled signals to help judge when the party is coming to an end, even though he remains bullish on the market for now.
The first sign is the "shoeshine boy indicator," which is based on a story about John F. Kennedy's father - Joseph P. Kennedy Sr. According to legend, Kennedy "sold everything just ahead of the 1929 stock market crash because the fellow shining his shoes started giving him stock picks. He reasoned, correctly, that if social interest in the stock market was that elevated, then it was time to get out."
Colas notes that although "Americans are all-in on the stock market," so far there are few indications that the current market setup is likely to change in the near term.
Secondly, the pace of U.S. initial public offerings (IPOs) is an "excellent" predictor of market tops, with sudden increases preceding a stock market fall, Colas said. Based on this, DataTrek sees a high for the S&P 500 .SPX at least one or two years away.
A third signal is when there are outsized gains for U.S. tech stocks, which reflects excessive investor confidence. In particular, a warning sign is an annual gain of 100% or more, which has only happened in Feb. 1999, or an annual increase of 60% or more, which is two standard deviations above the long-run average.
Here, investors can take solace that the Nasdaq Composite .IXIC is up only 35% over the last year.
The final warning comes at the hands of the Federal Reserve, and in particular the prospect that the U.S. central bank could raise interest rates again next year if inflation reignites. This is "the one bear case we worry about most," Colas said, though he added that it is not his base case.
(Karen Brettell)
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