US Stocks and PMs falling sharply – is this the end of the Supercycle? Big correction dead ahead?


S&P 500
Market indicator favored by Buffett flashes red

The last 2 times this happened, the market tumbled sharply. Is the Oracle right this time?

The economy and the market
Buffett thinks the value of all stocks in the Wilshire 5000 Total Market Index should be lower than the U.S. gross national product. The GNP stood at $16.13 trillion at the end of 2012, according to the Bureau of Economic Analysis. Well, the Wilshire 5000 hit that mark on March 4, and has subsequently risen to $16.57 trillion. That difference may seem trivial, but history tells us the gap should be seen as a sell signal.

Big correction dead ahead

By John Nyaradi
A growing lineup of fundamental, contrarian, seasonal and technical indicators points to the growing likelihood of a big correction dead ahead.

January 1973 : Dr. Greenspan assures investors that there was no reason why they should not be bullish. One year later, the Dow had lost more than 35%.

December 1996 : Dr. Greenspan characterizes the performance of the stock market as a result of “irrational exuberance.” Seven months later the Dow Jones Industrial Average closes with roughly a 25% gain.

March 15, 2013 : Dr. Greenspan appears on CNBC to emphasize that he would not use the term “irrational exuberance” to describe the current level of investor enthusiasm. Beyond that, Greenspan characterizes stocks as “significantly undervalued.” Time to buy or sell?

Seasonality : We are rapidly approaching the well-known “sell in May and go away,” as developed by the StockTraders Almanac. This well-documented approach indicates that most of the gains in the stock market occur between October and May with the “worst six months” just ahead generating down or flat returns.

Technical : The chart below illustrates the current divergence in global stock markets. The Shanghai Composite Index, the German DAX index and the Vanguard MSCI Europe ETF are all converging in declining patterns, while the S&P 500 continues climbing to record highs. Divergences like these are generally resolved one way or the other, so either the rest of the world’s financial markets need to improve or the S&P 500 could be set to decline.