Dave Nicoski of Vermillion Technical Research spoke on our show this last week and gave a number of reasons why he doesn’t yet see a major peak in stocks nor some of the typical warning signs associated with bear markets (click here for audio).
Some of the tell-tale signs we’ve identified numerous times in the past are a spike in oil prices, inflation, tight monetary conditions, and late-cycle euphoria often related to a strongly dominating sector. None of these things are currently present, with perhaps the last item under some debate.
Dave adds to this list two other things that we usually see before market peaks and impending bear markets that are also not yet present: a breakdown in two key sectors highly exposed to the economy and the health of the financial system. The first is the consumer cyclicals sector (XLY) and the second is the financial sector (XLF).
Consumer cyclicals consist of companies that are highly tied to the business cycle and economic conditions. Analysts watch trends in this sector to see whether consumers are cutting back or expanding purchases on discretionary items like entertainment, retail, hotels, etc. for clues on where the economy is headed. For that reason, this sector tends to peak before the overall market.
The financial sector typically peaks before as well since these companies’ profits heavily depend on interest rates, which tend to rise as the Fed tries to cool an overheating economy.
For evidence of this, we will show the 2000 top, the 2007 top, and today. Each image consists of the consumer cyclicals sector at top left, financial sector at top right, with the S&P 500 shown below each.
2000 Market Top
2007 Market Top
Today
For more information or to listen to this podcast interview with Dave Nicoski on our site or in iTunes, please see the following links below:
Audio Link | Other Expert Interviews | iTunes | YouTube | Comments or Inquiries
