Stock Market Top: Three Things Investors Need to Know About It
No matter how you look at it, the U.S. stock market is a dangerous place to be right now.
In the chart below of the Dow Jones Industrial Average, pay attention to the circled area.
Chart Courtesy of www.StockCharts.com
Of importance to note, the Dow Jones Industrial Average now trades well below its 50-day moving average and its 200-day moving average. This suggests bearish sentiment is building up, and the long-term and the short-term trends of the market are turning to the downside.
The Dow Jones Industrial Average is now down 2.2% on the year. If you bought big-cap stocks in January of this year, chances are you are down.
Stock Market Lags; Worries Increasing
Going forward, there are three things investors must know.
First; we have been seeing a mass exodus from U.S. stocks. Looking at the weekly data, between June and July, U.S. stock market mutual funds saw outflows of over $36.0 billion! In the previous two months, April and May, it was a similar amount. (Source: Investment Company Institute, last accessed August 4, 2015.)
Second; corporate earnings are terrible. As of July 31, we’ve heard from 354 companies on the S&P 500. Combined, they have reported a decline of 1.3% in their earnings. If this is the final number, it will be the biggest percentage decline in quarterly earnings since 2009! (Source: FactSet, July 31, 2015.)
Third; the amount of money being borrowed to buy stocks—known as margin debt—continues to soar higher. In June, margin debt on the New York Stock Exchange stood at a little more than half a trillion dollars! It has been hovering at this level since April. (Source: New York Stock Exchange, last accessed August 4, 2015.) The more money investors borrow to buy stocks, the bigger the risk for the general market, as when the market comes down, margin calls will accelerate the decline.
The combination of these three factors (mutual funds seeing massive outflows, corporate earnings contracting, NYSE margin at its highest level in history) is very dangerous.