Loading ...3 market warning signs predict 20% stock tumble
After a selloff this past week dragged the Dow Jones Industrial Average DJIA -0.42% into negative territory for the year, it’s worth noting that all three are flashing today.
The signals are excessive levels of bullish enthusiasm; significant overvaluation, based on measures like price/earnings ratios; and extreme divergences in the performances of different market sectors.
They have gone off in unison six times since 1970, according to Hayes Martin, president of Market Extremes , an investment consulting firm in New York whose research focus is major market turning points.
Bear in the air
The S&P 500’s SPX -0.29% average subsequent decline on those earlier occasions was 38%, with the smallest drop at 22%. A bear market is considered a selloff of at least 20%, with bull markets defined as rallies of at least 20%.
In fact, no bear market has occurred without these three signs flashing at the same time. Once they do, the average length of time to the beginning of a decline is about one month, according to Martin.