These Four Signs Will Tell Us When the Market Has Peaked
Editor's note: Folks are borrowing more cash than ever to buy stocks.
But Steve Sjuggerud isn't worried.
As he explains in today's Masters Series – adapted from a brand-new True Wealth Systems special report – he won't start to get nervous until four areas of the market start to break down...
These Four Signs Will Tell Us When the Market Has Peaked
Four indicators can give us the big picture to decode the overall health of the market.
What we want to see is "broad market participation." That's a fancy way of saying "lots of different areas of the market going up all at once."
If the S&P 500 Index is hitting new highs, we want to see new highs in other indexes as well.
Specifically, we want to see stocks in these four categories doing extremely well...
• Banks • Transportation companies • Smaller companies • The "equal weight" index (more on that in a minute)
These four categories give us pretty darn good vitals on the health of the bull market. If they all confirm what's happening in the S&P 500, we're good. The market is healthy.
But if they don't... If they're not continuing higher – or worse, if they're falling while the broad market marches on – then they're an advance warning sign.
Why these four specific categories? It's pretty simple...
When the economy is doing well, goods are moving and money is moving. So transportation stocks and bank stocks do just fine. But when the economy starts to crack, the share prices of these stocks are often the first places to show it. Transportation stocks and financial stocks can be great leading indicators of trouble.
The last two above also show the cracks – but in a different way. They tell us that fewer stocks are participating in the boom – and that the boom is wearing out.
Let's take a look at what these indicators are telling us today, starting with small caps...
Indicator No. 1: Small-Cap Stocks
During the 1990s "Melt Up," small-cap stocks issued a warning sign for the overall market...
They were 5% below their highs when the S&P 500 hit its (then) all-time high in March 2000. While you didn't know at the time that the overall market was peaking, you did know that the Russell 2000 Index – the benchmark for small caps – had stopped participating to the same extent. It was a warning sign.
The same thing happened in 2007. Small-cap stocks hit a lower high as stocks peaked...
So what's happening right now?
The Russell 2000 is currently near new highs alongside the overall market. This warning sign isn't flashing yet. Take a look...
Small caps aren't giving us any warning sign today. This measure says we're "all clear" for now.
Indicator No. 2: Transportation Stocks
Our next indicator – transportation stocks – has a fantastic track record of warning of a dying bull market. The charts of what happened the last two times tell it better than I can write.
Here's what the Dow Jones Transportation Average did as stocks peaked in 2000...
Transportation stocks peaked months before the overall market, and they were down nearly 30% by the time the S&P 500 peaked. That was a major downtrend... and an important warning sign for the overall market.
It happened again in 2007. The fall wasn't as extreme, but transportation stocks again peaked months before the overall market. They were an indicator of a sick bull market.
While this indicator can lead the overall market by months, it's not giving us a warning today. The Dow Jones Transportation Average has hit new highs since the Melt Up began and it is only slightly below that high today...
Again, this powerful indicator says the bull market is healthy... and can continue much higher.
Indicator No. 3: Financial Stocks
Next, we want to look at another sector vital to the overall market's health – financials.
The S&P 500 Financials Index peaked ahead of the overall market during both of the last two stock market peaks.
In 2000, financial stocks were 9% below their recent high when the S&P 500 peaked. Take a look...
The same thing happened during the 2007 peak. They were down 5% from their recent peak when the overall market peaked.
So financial stocks have a good track record of issuing warnings signs for the overall market. But they continue to hit new post-financial-crisis highs today...
Financials have a history of warning us of a dying bull market. But they aren't signaling any issue today.
Indicator No. 4: S&P 500 Equal Weight Index
You might not have heard of this one... It's the S&P 500 Equal Weight Index. This index tells us if most stocks are moving higher, or if only a few large companies are pulling the overall index higher.
You see, the regular S&P 500 is "market-cap weighted." That means the largest companies get a larger weighting. Apple (AAPL), for example, is a 3.9% weighting in the S&P 500, even though the index typically holds 500 companies.
Those kinds of outsized weightings mean that, at times, the overall market can rise while most stocks in the S&P 500 are falling. This is a similar idea to the advance/decline line.
The S&P 500 Equal Weight Index fixes this problem. Every stock is equally weighted, regardless of size. And this equal-weight index should mirror the S&P 500 when we're in a healthy bull market.
That didn't happen in 2000. Take a look...
The S&P 500 Equal Weight Index was in a downtrend by the time the overall market peaked in 2000. It was 6% below its 1999 high.
The same thing happened in 2007... The index hit a lower high as stocks peaked.
Once again, this indicator was a warning sign. But not now...
Today, this index is hitting new highs alongside the overall market. We're "all clear" once again.
The Market Is Healthy – So It's Time to Take Some Risk
You've probably noticed a trend...
We've identified a handful of indicators that flashed warning signs during the last two major market peaks. But NONE of them give us reason to pause today.
We've taken Mr. Market's vitals... And he has passed his physical with flying colors!
This won't last forever. The bull market will end one day. But it won't die of old age... The indicators we've highlighted today should give us warning signs long before a major crash.
So today, we have an answer to everyone's question. We know what things will likely look like before the Melt Up ends.
It will end when the market's vital signs are ugly... when the S&P 500 hits new highs but the advance/decline line is falling... and transports and financials start to dip... and small-cap stocks hit lower highs alongside lower levels in the equal-weight S&P 500.
Those are the warning signs we'll be watching for. Those will be signs that the end of the Melt Up is near.
I can't tell you the date that will happen. But I can tell you with certainty that it's not happening today... or tomorrow.
With the Melt Up in full force – and no worries about the end being near – our next step is obvious... Buy!
Good investing,
Steve Sjuggerud
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