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3 Signs That the Bull Market's Days Are Numbered

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If you've only been looking at the Dow Jones Industrials or the S&P 500 lately, then everything looks just fine in the stock market. Yesterday's big plunge aside, major market benchmarks have been hitting new record highs, extending their recovery beyond the doubling that they've seen since the 2009 lows. Even considering yesterday's drop of around 1%, it's far too premature to start calling for a correction.

But if you look beyond the headline benchmarks and do some digging, you'll find several signs that the overall stock market isn't quite as healthy as the Dow and S&P might lead you to believe. Take a look at three of those signs:

1. Small-cap stocks aren't keeping up with large caps.
Even as investors around the world seem to be flocking to U.S. stocks, small-cap indexes have been noticeably absent from the list of benchmarks setting new record highs. After hitting a record in mid-March, the Russell 2000 has failed to get back to that level and now stands nearly 4% below its all-time high.

What makes that lagging performance particularly troubling is that small-cap stocks helped lead the markets higher throughout the past four years. At its peak, the Russell 2000 was up more than 175% from its March 2009 lows, which is quite a bit stronger than the 135% move up for the S&P 500 over the same span. It may be simply that large caps are finally catching up to their smaller counterparts, but the move also suggests that conservative investors are getting more defensive and taking more volatile stocks off the table.

2. Emerging-market stocks have corrected much more dramatically than U.S. stocks.
The international stock markets give a much uglier picture of the global economy than U.S. markets, and in particular, emerging-market stocks have seen relatively terrible performance compared to the domestic multinationals that get so much of their business from emerging markets. The broad-based Vanguard Emerging Markets ETF (NYSEMKT: VWO  ) has fallen steadily throughout 2013 and now trades fully 7.5% below where it closed on the first trading day of the year.

In particular, Chinese stocks have held back the global markets. The closed-end China Fund (NYSE: CHN  ) is down 10% from its early February levels as fears escalate about the emerging giant's ability to keep its economy growing in the face of an overheating real estate market and inflationary pressures. Even stocks once considered stalwarts in China have plunged, with Internet search leader Baidu (NASDAQ: BIDU  ) once again testing new 52-week lows even as it follows Google's lead in developing digital eyeglasses. Even as economic data in the U.S. has improved, macroeconomic trends internationally look far less favorable, and until they turn, international stocks won't do as well as their domestic counterparts.

3. Formerly hot sectors have taken big hits.
In every bull market, certain industries lead the way higher. When those industries start to turn around, it can be a sign that the overall market will follow suit.

For instance, over the past couple of weeks, many homebuilders have seen their stocks fall substantially. In particular, Hovnanian (NYSE: HOV  ) and Beazer Homes (NYSE: BZH  ) have reacted negatively even to news last week that home prices had risen by more than 8% year over year. Occasional pessimistic data points, such as new-home sales falling more than expected last month and consumer confidence figures declining, have been enough to make investors question whether there are further gains to be had from stocks that have already soared. You can find similar stories in other hot sectors, such as financials and airline stocks.

Wait and see
After four years of steady and dramatic rises, the stock market is arguably overdue for a correction. But even these signs of a potential end to the bull market don't mean that such a correction is imminent. What they do tell you, though, is that it's time to make sure your portfolio is ready to handle whatever comes next -- including a substantial downturn that could potentially be right around the corner.

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Read/Post Comments (9) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 04, 2013, at 11:09 AM, brewerra wrote:

    How about the number 1 reason...the media is trying to whip up fear and create news again rather than report it. The fact is that for the stock market to be successful, it has to continue going up, but every time it reaches new highs, the media tries to spread panic.

  • Report this Comment On April 04, 2013, at 12:31 PM, fwe43 wrote:

    Everybody and their brother is predicting a market top right now. Everybody thinks they're just so smart because they "know" that the market has rallied only because the Fed is printing money. But never is it that simple. Never is everybody right.

  • Report this Comment On April 04, 2013, at 2:18 PM, Liebuster wrote:

    The cheap stocks are numbered because you people feed fear down a potential trader's throat.the volume would rise if everyone got in to the stock market.

  • Report this Comment On April 04, 2013, at 3:58 PM, mainelefty wrote:

    Really. An article about the future direction of stock markets that never once mentions earnings.

    CHN is trading about 15% below NAV and paid over $3 in dividends and distributions a few weeks ago. Net installment is, unfortunately, probably next December, but the yield has been terrific.

    CHN dropped by 30% in 2011. It has been stable since, although the current price of under $21 is at the bottom of its range.

    Some of the housing stocks now making dimes per share are trading for higher prices than when they were making dollars per share in 2006-7. With employment only slowly growing and austerity the fixation of our national geniuses in Congress, it's no surprise housing concerns are having trouble achieving escape velocity. Lacking that, the law of gravity will be heard from.

  • Report this Comment On April 04, 2013, at 9:46 PM, howardstevens wrote:

    He forgot to mention that a black cat crossed his path.

    Crystal ball gazing like this is what drives people away from the stock market which is successful for those with LONG TERM objectives, who do not TRADE and mostly use low cost, broad sector ETF index funds to get rich...slowly.

    Alarmist nonsense like this is ignored by such conservative investors whose dynamic portfolio management consists EXCLUSIVELY of re-adjusting the holdings when target allocations get out of whack, thus always selling high and buying low.

    We always KNOW where the market has been, we can only GUESS where it's going.

  • Report this Comment On April 06, 2013, at 10:13 PM, tomd728 wrote:

    As long as offered rates offer no real asset growth

    then these equity markets will reward the enterprises who deliver value and growth through solid management.

    Nothing changes though, for the usual disappointment from failure to execute in any sector.

    Here is a view from today's NYTimes if you wish to read:

    http://www.nytimes.com/2013/04/06/business/history-suggests-...

  • Report this Comment On April 13, 2013, at 4:43 PM, ChrisBern wrote:

    Good article, and I'm surprised by the vitriole in the other comments. The facts are the market is overpriced despite slowing economies all around the world and an artificial economy in the U.S. that is reliant on record deficits and QE. Anyone buying the market here is simply speculating on the "greater fool" theory.

  • Report this Comment On April 14, 2013, at 5:13 PM, jlclayton wrote:

    This article did not spread fear and panic, was not alarmist, nor did it pretend to have a crystal ball. It gave 3 valid reasons why there may be challenges to the market going forward and suggested that it was a good idea to review your portfolio for any vulnerabilities.

    Anyone that is upset by that should probably follow the advice closely since obviously you cannot handle the thought of a market downturn and shouldn't be in stocks in the first place.

  • Report this Comment On May 07, 2013, at 8:00 PM, pegasuslon wrote:

    Great article.

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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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10/24/2014 3:59 PM
BIDU $222.55 Up +5.52 +2.54%
Baidu CAPS Rating: ****
BZH $18.09 Down +0.00 +0.00%
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CHN $20.99 Down -0.01 -0.05%
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HOV $3.86 Up +0.06 +1.58%
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