At the close of 2015, we got several bearish signals and positioned our portfolios to be almost neutral to the stock market by buying ETFs with inverse stock market exposure.
In other words, our net exposure to the stock market is now very near zero.
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If the market weakness continues through the first week of January, we expect to get additional sell signals.
These are the most bearish signals we’ve seen since April/May 2008.
Here’s one chart that may help visualize what we are seeing.
This is a chart (above) of the All World Index, which reflects global economic conditions.
There’s rarely a perfect parallel in the stock market, but general patterns do tend to repeat themselves and the current conditions are shaping up to look a whole lot like the market top in 2007-2008.
That doesn’t mean the decline will turn out the same, but it does warrant caution.
Many other signals and data points that tend to accompany market tops have occurred in the past year.
Here are 14 of them:
- Declining earnings for several quarters
- Peak margin debt
- Declining transportation index
- Flattening yield curve
- Deteriorating market breadth
- High-priced IPOs
- Elevated M&A activity
- Falling commodity prices
- Trendlines breaking down
- Aging bull market
- High-yield debt dropping
- Stretched PE valuations
- Manufacturing index below 50
- Monetary tightening
Takeaway? In my opinion, there are a lot of reasons to be defensive right now
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