2 Warning Signs for the Market
By Raul Elizalde
NEW YORK (AdviceIQ) -- While the Standard & Poor's 500 index has been in record territory for about a year, two warning signs suggest trouble ahead: a divergence between small and large stocks; and between consumer discretionary and consumer staples stocks. Should you be concerned?
Since April 2013, the index has broken successively higher records despite loud disagreements among analysts and strategists about whether these levels are justified or not. Just this week, despite a few dips, the S&P 500 approached the psychological 1,900 level.
After losing about half its value five years ago, the S&P 500 is now more than two times higher than its worst point of March 2009. Yet despite this stunning rally, it is hard to find investors exuberant about stocks today like they were about Internet stocks during the dot-com frenzy, houses in the real-estate boom or gold when everything else seemed toxic.This is not typical: When assets boom, people tend to jump in. But those who remember the infamously wrong-headed 1999 book Dow 36,000 are hard-pressed to find any book remotely as optimistic on the best-seller lists today. So the rally grinds on, with or without the public's conviction. The indifference with which investors greet these record levels is, paradoxically, bullish. Markets reach a peak when everyone is all-in and nobody is left to buy. Since there is still plenty of spare capacity to load up on stocks, the potential for further strength is undeniable. But too much exposure to stocks is not the sole cause of market reversals. Things can take a turn for the worse if unexpected events scare people, or if confidence weakens when conditions deteriorate. The problem is that, by the time the scary stuff hits or weaker conditions become evident, it is usually too late. That's why investors who are already skeptical scrutinize the market for clues of hidden dangers. Volatility, for example, remains remarkably low: There was only one day in the past month when the S&P 500 moved more than 1% in either direction. Inter-asset correlation, while still somewhat elevated, has so far remained stable. And interest rates, long expected to soar, have not moved much in months -- the 10-year U.S. Treasury note has remained pretty much constrained to a narrow 2.50% to 2.80% range since late January. Optimists shrug off the divergence between aggressive and defensive stocks as insignificant, while pessimists look at conditions that suggest calm and see them as a prelude to the proverbial storm. It is impossible to say who's right, but clearly the unusual conditions will keep investors on edge and uncommitted, even if the market continues to crawl to higher levels. -- By Raul Elizalde, president and chief investment officer of Path Financial LLC Investment Management in Sarasota, Fla., where he writes the e-letter Straight Talk. AdviceIQ is a network of financial advisors that writes insightful articles for the public about investing and wealth management. All articles are edited by AdviceIQ's editor in chief, Larry Light. AdviceIQ certifies that all its advisors have no regulatory infractions. To subscribe to AdviceIQ's RSS feed for personal finance articles written by financial advisors and AdviceIQ editors, click here. Follow AdviceIQ on Twitter at @adviceiq.
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