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The Bears' Case For A Coming Stock Market Correction

We hate to be Debbie Downer in the midst of a roaring bull market that has taken US stocks to five-year highs, but the arguments for a pullback or outright correction are gaining steam. Here’s the bears’ theory of the case:

1)  Short Selling: Money Morning points out, citing Bloomberg data, that in the past two years stocks have declined soon after short selling fell to such low levels - 0.4% in March 2011 and 3.3% in March 2012. Short sales declined to just 5.6% of shares trading in February.

2)  Insider Selling: When corporate execs sell in droves, that’s not generally considered a bullish signal. According to data released by Argus Research and cited by Money Morning last month, insider selling outpaced insider buying by a ratio of 9.2-to-1.

3)  Bull Market Cycles: Market analyst Laszlo Birinyi thinks market rallies, which since 1962 have tended to last four years, follow predictable patterns. (The current bull market run is the eight longest in history.) As you can see from the chart courtesy of Hibah Yousuf at CNNMoney, we are in the exuberance phase of the stock price run-up—and maybe have another couple of years before we tank and start over, according to Binrinyi.

four stages

4) Margin and earnings:  Sam Ro at Business Insider recently posted a series of interesting charts outlining the stock market's current vulnerabilities. Here are two of the them, underscoring the rising level of stock purchases with borrowed money (on margin), and deteriorating corporate earnings expectations.

borrowed money


expectations tumble

Source: Pragmatic Capitalism

5) Weakening breadth: Finally, Bespoke Investment Group points out that the breadth of the rally, measured by stocks trading above their 50-day moving averages, is weakening. Some 73% of stocks in the S&P 500 index are currently above their 50-day moving averages, vs. 90% of stocks back in January.

moving average

But then of course there are the bulls: Paul Lim at the New York Times has a good overview of their case heading into Q2.

Photo: ucumari

The post The bears' case for a coming stock market correction appeared first on Smarter Investing.

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