Two Most Important Charts on Stocks You Will See This Year

What a Bubble Looks LikeThis month marks the fifth year of the rally in stocks that started in March of 2009. Back then, the Dow Jones Industrial Average traded as low as 6,400 and uncertainty was severe. In the midst of all this, a buying opportunity of a lifetime was born. I told my readers to buy close to when the market bottomed in March of 2009.

Five years later, the opposite is happening. I continue to believe the stock market is reaching a top; I continue to tell my readers stocks are very risky. The upside potential for the stock market is diminishing and the risks of a severe downside move are increasing: preserve your capital is my message now.

From March of 2009 to the end of February 2014, the S&P 500 has gone up about 155%. Other indices like the Dow Jones Industrial Average and NASDAQ Composite have shown similar—if not better—performances.

But as key stock indices soar, we are seeing the fundamentals that traditionally drive stocks higher weaken. Corporate insiders are dumping stocks at an alarming rate; corporate earnings growth has dropped to its slowest pace since 2009; the Volatility Index is near the low it was at just before stocks collapsed in 2007; and margin debt on the NYSE has reached a record high—all very bearish factors.

And from a technical point of view, something interesting has also happened on the key stock indices. Below is the weekly chart of the S&P 500.

$ SPX S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Since the beginning of 2012, there hasn’t been any major correction or pullback in the stock market and trading volume has steadily declined (a negative indicator).

Corrections in any rising market are healthy—be it the stock market, real estate, commodities, or bonds. If an asset class continues to increase without any disruption, it takes the shape of a bubble. This is exactly what has happened in the U.S. stock market since 2012.

Last but not least, the blue line on the chart above is of the 200-week moving average of the S&P 500, which currently sits about 25% below the current S&P 500 price. What does this mean? Over my 30-year investment career, I have learned one important factor about the stock market: it always comes back to its 200-week moving average.

To see what I’m talking about, look at the long-term chart of the S&P 500 below. I have circled the areas at which the S&P 500 has come back to its 200-week moving average, be it a move above or below that line.

$SPX S&P 500 Large Cap Index Chart Chart courtesy of www.StockCharts.com

With both the fundamentals and the technicals saying the stock market is a risky place to be, we await its crash back to reality.