Monday, 4 August 2014

Warning signs flashing for stock market

The Standard & Poor's 500 index fell 2.7 percent last week, its worst weekly drop since June 2012. The STOXX Europe 600 index fell 2.9 percent.

Mark Hulbert at MarketWatch wrote over the weekend that according to Hayes Martin, president of Market Extremes, an investment consulting firm, there are signs in the market that show that the stock market is likely to fall even further.

Over the past 45 years, the stock market has lost more than 20% each time three warning signs flashed simultaneously.

After a selloff this past week dragged the Dow Jones Industrial Average into negative territory for the year, it’s worth noting that all three are flashing today.

The signals are excessive levels of bullish enthusiasm; significant overvaluation, based on measures like price/earnings ratios; and extreme divergences in the performances of different market sectors.

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