First Signs of a Market Correction

The stock market has risen this year with the Dow Jones Industrial Average hitting an all-time intraday high of 18,232.02 on May 19. However, there are some concerns. One is that the rally seems to have been limited to big cap stocks as the Russell 2000 did not follow suit. Investing Daily asks if the small-cap index is in a rut.

The Russell 2000 Index (^RUT) is feeling a bit sluggish these days.  Who can blame it?  After capping off 2014 with a 9.7% gain in the fourth quarter, the index rose another 4.3% in the first quarter of 2015.  With the onset of spring showers, the Russell wilted 2.5% in April and so far in May is up 2.0% month to date.

The Russell 2000 is an index created to capture the performance of 2,000 small cap companies.

Is all of the money flowing into large cap blue chip stocks because investors want the apparent safety of large companies?  Is this one of the first signs of a market correction?

Five Stocks that Could Be Worrisome

Forbes looks at five stocks that could become a drag on the Dow, voicing their concern that the bull market is getting old and tired.

The Dow Jones Industrial Average set an all-time intraday high of 18,351.36 on May 19 just as earnings season was coming to an end for the 30 components of this benchmark index. Friday’s close of 18,232.02 had the Dow up just 2.3% year-to-date and 0.7% below the all-time high. Not ending the week above my semiannual pivot at 18,328 is a warning but the index is still above my monthly pivot at 18,199.

The weekly chart for the Dow 30 ended last week positive but overbought with the index above its five-week modified moving average of 18,081 with the 12x3x3 weekly slow stochastic reading rising above the overbought threshold of 80.00 at 80.41. In this environment there are five stocks that are showing deteriorating technical profiles which questions the sustainability of continuing a bull market for stocks. Here are their profiles.

The five stocks mentioned are:

  • Boeing, up 11.4% year to date
  • Chevron, down 6.5% year to date
  • Disney, up 17.1% year to date
  • Home Depot, up 6.8 year to date
  • Verizon, up 6% year to date

Each of these stocks has peaked and contributed to the high of the Dow. There are host of technical cues that indicate that these stocks have topped out and that worse times are to come. If that is the case these five stocks are some of the first signs of a market correction.

Overvaluation Is Not Just in the USA

CNBC looks at the rallying Chinese stock market and notes that what is missing is economic growth.

Chinese stocks rallied for their fifth successive day Monday to breach seven-year highs but growth prospects for the world’s largest economy this year are yet to pick up according to economists.

It would appear that on one hand investors trust the Chinese government to provide stimulus measures to keep the economy growing. On the other hand many simply seem to believe that what is going up will always go up. This is always one of the first signs of a market correction.

First Signs of a Market Correction PPT

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