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Posted on 17 March 2013 | 1,512 views

5 Warnings for a Stock Market Crash in 2013

Investors need to look hard for signs of where stocks are going from here and most market indicators are suggesting that the bull market that has carried U.S. stocks a long way from the lows of March 2009 is just about out of steam.

There are a lot of measures that tell us markets areĀ overbought at this point, nothing goes up in a straight line. The likelihood of some sort of downturn has increased dramatically in recent months.

Here are five indicators investors need to bear in mind:

1. Low Volatility: One might think that low volatility is good for the average investor, but it simply isn’t so. Low volatility tends to precede powerful reversals that can wipe out investors, as was the case in 2000 and early 2008, and at other key turning points over the past 100 years. Right now, the S&P volatility index, known as the VIX, is about 15, and has been in that low territory since January 2013. The normal range is between about 20 and 40.

2. Bull Market’s End Overdue: The bull and bear cycles of the stock market tend to follow set patterns, and this bull market has already lasted longer than average. The average duration of bull markets since 1962 has been four years — the exact length of the current one.

3. Short Selling Plummets: Short sales — bets that stocks will drop — fell to just 5.6% of shares trading last month. According to Bloomberg data, in the past two years stocks have declined soon after short selling fell to such low levels — 0.4% in March 2011 and 3.3% in March 2012. When you have a market where investors are all in, there will no longer be short covering — as short interest has continued to decline, it as a sign of a market top.”

4. Insider Selling Spiking: Recent insider trading has tilted strongly toward selling in recent months, a very bearish signal. According to data, insider selling outpaced insider buying by a ratio of 9.2-to-1. When insiders are selling while everyone else seems to be buying, there’s usually a very good reason.

5. Very Bullish Sentiment: Several indicators of investor sentiment have been unusually high lately, and that typically signals a market top. The Panic/Euphoria model had spiked to near its highs of the past three years, suggesting frothy levels have ensued.” The index is now flashing warning signs in both the U.S. and Europe.

Finally, it’s worth noting that a recently created index, which incorporates indicators such as the VIX, as well as eight other technical, macroeconomic and fundamental factors, is also flashing a warning that this bull market is in danger.

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