21 Stock Market Warning Signs Giving Investors Around The World Cold Sweats

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This past week saw the stock market sell-off a bit.

With markets near all-time highs, is it possible we’ve seen the top?

“They come and go,” said Jack Bogle, warning that the market is probably due for a 25-50% sell-off. “I went through one in 1973-1974, I went through one in 2001, 2002, 2003; I went through another one 2008-2009. They’re kind of scary – often terrifying – but it’s typical.”

Indeed, the bears seem to have an overwhelming number of reasons to be worried.

We’ve compiled 21 big warning signals that are keeping the stock market’s bulls on edge and its bears on the sidelines.

First, there are signs that the latest buyers are buying recklessly.

Also, there is a lot of proof that the outlook for demand is deteriorating, profits are falling, and profit margins are too optimistic.

And it’s not just a single company or industry sending warning signal.  The breadth of warnings is both historic and startling.

If you’re an investor thinking about making a move in the stock market, then you should probably consider these warning signals.

Investors and traders are increasingly buying stocks with borrowed money.

Source: Doug Short

Stocks are now outpacing inflation expectations at a rate that preceded that last two crashes.

'Expectations of price increases (inflation) are a sign of potentially stronger demand growth and higher margins, which is a positive for stocks.'

Source: @ParagonCap

Meanwhile, corporate revenues have been disappointing.

'Revenue growth relative to expectations has been weak recently (Exhibit 27), despite companies cautiously managing expectations. Without reasonably strong revenue growth, there is increasing risk to the profit margin estimates embedded in consensus.'

Source: Morgan Stanley

Manufacturing in the US has stalled.

China's manufacturing sector is now contracting for the first time in seven months. This is the world's second largest economy and key engine for growth.

Capital spending is unlikely to pick up, argues Morgan Stanley's Adam Parker.

'While US capacity utilization has risen, recent trends have shown its rate of change has slowed (Exhibit 17), which can weigh on pricing. In fact, recent month-to-month data are the worst in five years. So, we expect a slightly better economy in the second half, slightly better pricing power, and not a lot of capital spending. We have not seen in the industrials or technology sectors any signs of backlog cancellations or extensions, book-to-bill increases, or difficulty in delivering product. So tactically, we don't think capital spending pickups are likely based on the higher frequency data we analyse.'

Source: Morgan Stanley

Central banks around the world are desperately cutting rates to get the global economy going.

Source: Deutsche Bank

Global currency devaluation is making the dollar stronger, which is making American exports less competitive.

Earnings expectations are only coming down.

'Consensus estimates for 2013 have fallen, but we think they will likely decline further (Exhibit 21). Analysts are embedding 8% earnings growth in 2013, followed by 11% growth in 2014. In our minds, the debate isn't whether the consensus estimates are too high. Rather, the debate is whether anyone will care. For the last year, estimates have declined and the market has rallied.'

Source: Morgan Stanley

Massive share buybacks can't even keep earnings per share up.

Those earnings expectations are coming down for every quarter.

And it's a lot of companies screaming these warnings.

'The ratio of negative-to-positive guidance remains at multi-year highs -- currently 4.1 for second quarter 2013, as companies continue to pare back expectations (Exhibit 24).'

Source: Morgan Stanley

Earnings pessimism comes as record high profit margins are only expected to go higher.

Companies across the board expect margins to be higher.

'Analysts are forecasting the highest fraction of companies to post year-over-year margin expansion in our data history, despite the already near-record profit levels today (Exhibit 23).'

Source: Morgan Stanley

But, profit margins are being threatened by a recent uptick in wages.

John Hussman warns that profit margins always revert to a mean, and that we'll see a profit contraction over the next 4 years.

'Almost universally, Wall Street analysts are making the mistake of valuing stocks on the basis of a single year of forward operating earnings, as if the present estimate is a sufficient statistic that is representative of the entire future stream of cash flows. Even profit/GDP shares much less extreme than today's have always been followed by a contraction of profits over the following 4-year period.'

Source: Hussman Funds

Rising stocks prices and falling earnings expectations are making stocks more and more expensive.

Stocks are expensive relative to 10-year average earnings. This ratio, popularised by Robert Shiller, is above 23, which is much higher than the long-term average of 15.

Even perma-bull David Bianco thinks the stocks market's next 5% move will be down.

The venerable Jack Bogle has warned us a 25-50% downward move is almost certain.

'I went through one in 1973-1974, I went through one in 2001, 2002, 2003; I went through another one 2008-2009. They're kind of scary -- often terrifying -- but it's typical.'

Source: Jack Bogle, CNBC

BONUS: The gold-silver ratio has dropped, which signals a risk-off trade is coming, says David Rosenberg.

'The gold-silver ratio has risen to its highest point in three years (August 2010) and in the past this served as a flash-point for a renewed risk-off trade. See the chart below and the divergence (S&P 500 surging and the gold-silver ratio sliding -- historically this has a 71% correlation, likely because silver has far more industrial applications and as such this ratio is viewed as somewhat of a global economic barometer.) I have to say that when I read the front page of the USA Today business section and see this lead title: With Stocks This Hot, Why Worry?, with famed strategist Ed Yardeni declaring this to be the 'mother of all melt-ups,' I do begin to worry. The bull market may well be in complacency.'

Source: Gluskin Sheff, David Rosenberg

But there are also plenty of reasons to be optimistic...

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