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Five Reasons Why The US And Other Major Stock Markets Could Soon Top Out...

I know, I know. I have written about a top nearing since the autumn of 2013 when I drastically reduced my long exposure. Yet most stock markets around the world kept going up (although at a slower pace).

Here are once again three time-proven indicators why US (and many other stock markets who bottoned out in late 2008 and early 2009) might soon top out in my opinion...

  • Shiller P/E (1) above 26 at the moment
  • Market Value vs Nominal GDP (2) around 125% at the moment
  • Lack of market corrections above 10% in recent years (3)

Figures (1) and (2) can easily be reviewed with daily updated numbers on sites like Both numbers are near all time-highs in mid-2014...



I would like to focus on (3) for a short while now...

The Bigger they Come the Harder they Fall

The S&P500 has now gone nearly 800 days since a correction of more than 10 percent - the "meaningful" level for many analysts. The more extended the market becomes, the larger the eventual decline may be. Over the last 50 years, the longer the time between market corrections, the steeper the drop once the correction does occur.(...)

In his famous speech, [former Fed Chairman William McChesney] Martin preceded his punch bowl comment by saying, on behalf of the Fed, "…precautionary action to prevent inflationary excesses is bound to have some onerous effects…". The flipside -- a lack of precautionary action by the Fed -- will have its own set of consequences in time. It is very difficult to say when exactly these will happen, but near-term indicators suggest the hangover won't hit while you're relaxing at the beach this summer.


There are also two other indicators I already discussed in earlier Instablogs:

  • Net money outflows in bad credit risks (China, USA) growing and more shadow banking and credit crumblings in China
  • FED exit (or least public announcements suggesting an exit) from easy monetary policy and moving (rising) interest rate levels

Now, before you sell everything right away next Monday:

Keep in mind bull markets can keep going longer than many anticipate, they can even go parabolic as the cycle ends; for example the Shiller P/E was above 40 back in 1999-2000 and TMC/GDP was near 150% for a short while in March 2000. The following drop in 2001-2002 however did once again prove what I quoted above...

The Bigger they Come the Harder they Fall

I would advise all investors to at least add trailing stops to their long positions as of 2014-2015 and be extra careful with levered and high-beta stocks this late in the cycle.