Stock Market: Four New Warning Signs Emerge

New Warning Signs EmergeAccording to the Investment Company Institute, investors have been taking money out of U.S. equity funds since April of this year.

Between April and July of 2014, investors pulled $32.0 billion from long-term stock market mutual funds that invest in U.S. stocks. While August’s monthly figures are not available, looking at weekly data, it appears investors ran away from the stock market in August as well. (Source: Investment Company Institute web site, last accessed September 16, 2014.)

How does a stock market rise when investors are selling? Well, there is a bigger anomaly in the stock market you need to be aware of.

Another indicator is suggesting investors are scared about the stock market. The yields on long-term U.S. bonds have been declining since March despite the Federal Reserve’s prediction that interest rates are to rise sharply next year and in 2016.

30-Year T-Bond Yield Chart

Chart courtesy of www.StockCharts.com

As the chart above shows, yields on long-term U.S. bonds continue to go lower. Again, this is on the backdrop of the Fed getting out of the money printing business (and warning investors that interest rates are going to rise).

U.S. bonds have historically gone down when the Fed has told us interest rates are going to rise. But the fear of higher rates (and lower bond prices) is overwhelmed by the strong demand for U.S. bonds, as scared stock market investors jump into U.S. bonds—where they believe their money will be safe.

There are definite cracks starting to show in the stock market. While we hear and read about the main indices moving higher, there are fewer and fewer companies reaching new price highs, which makes me question the strength of the overall stock market.

According to data compiled by Bloomberg, 47% of companies on key stock indices like the NASDAQ Composite Index are down at least 20% from their peaks made in the last 12 months. As for the broader Russell 2000, 40% of the stocks are in this situation. (Source: Bloomberg, September 14, 2014.)

Finally, the number of stocks trading above their 200-day moving average continues to decline, as this chart illustrates:

NYSE Stocks Above 200 Day Moving Average Chart

Chart courtesy of www.StockCharts.com

This last chart above shows the number of companies on the New York Stock Exchange (NYSE) that are trading above their 200-day moving average. The 200-day moving average of a stock is important because it shows us if a stock is trending higher or lower over the long term.

The number of companies on the NYSE trading above their 200-day moving average has declined significantly over the past few months. Roughly 2,800 companies’ shares trade on the NYSE—and only half of them are trading above their 200-day moving average…half of the companies are showing their stocks’ long-term trend is still intact. The other half is facing scrutiny.

Dear reader, the risk of a major stock market sell-off increases each day. Investors selling U.S. stock market mutual funds, the price of U.S. bonds rising despite the promise of higher interest rates by the Fed, a significant portion of stocks down 20% or more from their highs, and 50% of stocks below their 200-day moving average.

How does a stock market rise on these circumstances? 2014 sure does feel a lot like 2007 to me.