Three factors that put stocks in jeopardy are registering simultaneously, signaling a dangerous period for the market. Consider these three factors:

1. The Cook Cumulative Tick indicator (CCT) is at the greatest divergence ever seen since I began keeping records in 1986.
The CCT is a leading indicator that foretells stock market price moves. A bull market will register expanding plus numbers before prices expand. The greater the positive reading, the greater the movement upward in a time frame. For example, if the S&P 500                                                                                                                                                                                                         SPX, +0.85%                                                                                                                                                 rallies 10 points, the NYSE ordinarily prints high plus tick.


The tick is similar to horsepower. The more horsepower expended, the more prices accelerate. A reading exceeding +1000 tick typically corresponds to a gain of significance in the S&P 500. Conversely a -1000 tick corresponds to significant declines. You expect to accelerate by depressing the accelerator. The more you press, the more speed is generated while covering more ground in a shorter time frame.
This is normal, but what happens when the abnormal occurs? What happens to your heart rate when you press the brakes but they do not work. A car with no brakes speeds faster, and the end will not be pretty. This is exactly what started to happen this year in May. Stock prices increased on no horsepower. In fact, the CCT readings indicated the prices should have been declining, not advancing. The ordinary instance of a positive CCT creating positive stock prices was torn asunder.
  U.S. market history has seen only two previous occasions of the massive divergence,2000 and 2007, which each led to greater than a 40% decline.

2. We have gone two full years without a 10% correction.
The lack of a meaningful correction is a severe divergence from the norm. In the summer of 2012, stocks printed greater than a 10% pullback. Since that time, all corrections have been contained to single digits. History shows that other incidents of abnormally small corrections have preceded large corrections exceeding 20%.
The years 2006 and 2007 each saw S&P 500 pullbacks just shy of 10%, in fact, 2007 was at 9.7% prior to the 2008 correction of 49%. Corrections actually create a healthier market, neutralizing excesses so that the market can rebuild. The more the market is tired, the more rest is needed to regain vitality. Long extended periods of muted corrections make the bears grow stronger. All bulls should welcome double-digit corrections.


3. Market cycles are signaling an environmental change.
Bull markets do eventually end. Notable bull markets of the last 30-plus years have a shelf life. The longer they persist, the more ripe they become. The 1982-1987 bull market broke stock prices out of a long confinement below 1000 on the Dow Jones Industrial Average                                                                                                                                                                                                         DJIA, +1.06%                                                                                                                                                 The pent-up demand for equities generated a 200% gain during that span, the best percentage gain in decades. Stocks were the favorite asset of the 1980s. The period of late 1987 generated a harsh reality check to the buy-and-hold mentality. A 35% decline in prices was seen from late August until a bottom in December 1987.
The 1982-1987 bull market lasted five years, from August 1982 to August 1987. The 2002-2007 bull run bottomed in October 2002 and registered a top in October 2007, another five year span. Both of those bull markets ended in corrections exceeding 35%.
This 2009-2014 period is the longest continuous rally in more than 30 years, and comes at the tail end of the Fed’s quantitative easing. This current rally has exceeded five years, and gained almost 200%. Is too much inducement by the Fed a smart move?
Wise investors should heed these signs. History is a reference for the future; pay attention.