What My Stock Market Warning Sign Is Saying Today

David Frost // Market Outlook


July 23  

Readers of my stock market trade alerts have made a fortune in this bull market.

We’ve made great gains in the market by simply following the common sense and technical market indicators, and simply ignoring the “doom & gloom.”

But no bull market or trend for that matter lasts forever.  The good news is when an end is near, there are very distinct and recognizable warning signals that flash in big red lights – at least in my office.

Today, I want to discuss two different metrics.  One is the relationship between two markets that has served us well in the past.  The other is more of an obscure indicator.

The first one is an oldie by goodie.  It’s the fact that treasury bond prices have been on a steady rise, forcing yields lower.

The only reason I can think of for a continued rally in treasury bonds is to protect money.  Protect money from losing value.  Get it.  This isn’t something that needs tons of analysis and thought.  If people are buying treasury bonds, at ridiculously low rates, then they feel like the return of capital is much more important right now than return on capital.  This normally spells trouble for the stock market.  Since the beginning of time, the bond market has always been the smarter “child.”

You will certainly hear many of the pundits in the financial media justify the lower rates with some made up reason why it’s perfectly rational, followed by another made up reason why stock prices will continue higher.  (They might, but the reasons are from the land of make believe)

All I know is when treasury yields are headed to new (recent) lows, and the stock market is at all time highs, something is just not kosher.

The second metric is right out of the book of common sense.

Driving in my car, listening to CNBC on the radio.  (I can’t help myself)  Whether I’m in the car for 10 minutes or 2 hours, like clockwork I can always count on a laugh from either the questions the host asks, or the answers the guests provide.

Today was no exception.  To protect the innocent, we will call him John.  John was asked about stock market valuation and his thoughts on where we go from here.

After a brief explanation about why GDP will pick up and stock market multiples will expand for the rest of this year, and next (nonsense at best), he went on to say the following:

I don’t see any surprises on the horizon to disrupt the stock market

Now I don’t know about you, but I’m pretty sure that the spirit of a surprise is something you didn’t anticipate or expect, hence the term surprise.

It’s right up there with the catch phrase during the dot com or real estate bubble that went like this –

Buy high and sell higher

When people venture into the dangerous area of justification and rationalization, it’s usually a dangerous journey that ends badly.  When you let emotions get in the way of investing decisions, you’ll get sacked every time.  I realize people who own stocks want the market and their investments to go higher, but sometimes you need to sit back and ask yourself “does this make sense?”

I wouldn’t read too much into any one thing like this, but when they start to pile up, pay attention!  It’s just another item to add to the laundry list, which is now on page 2.

Enjoy today’s market review video –

About the Author

Trading and investing in markets is second nature to some, but a mystery to others. The goal is to provide a forum where everyday people aspiring to be part time or full time traders will learn how view markets differently and profit beyond their wildest dreams.

David Frost