The earnings recession
Earnings estimates for the S&P 500 have been sliding downward — from expectations of $137 in earnings in June to today’s expectation of $107. Wall Street expectations for shrinking corporate profits are a bad sign for the economy — yet stocks are flat on the year.
Junk bond warning bell
High-yielding (junk) bonds are sounding a warning bell. The average yield on the entire junk bond universe has increased 8% in 2015. This jump in yields is a big deal because the junk bond market is a leading indicator of the stock market. The high-yield bond market is screaming danger. Charts that Make the Case for a Stock Market Correction in 2016
Retail sales are plummeting
Another leading indicator to pay close attention to is retail sales. Consumer spending — which represents roughly two-thirds of the US economy — has been in steep decline. There has been a strong correlation between plunging retail sales and plunging stock prices.
Global trade has tanked
According to the International Monetary Fund, global exports for 2015 are shaping up to be the worst since 1957. That’s horrible! The decline in global trade has also been showing up in shipping rates. The Baltic Dry Index — an index used to measure the cost of global shipping freight rates — has been making new record lows. Declining world trade is a clear sign of a slowing economy.
Record M&A activity is a dangerous sign
In November, the global merger and acquisition volume was the highest level on record. Year-to-date M&A activity in the US is already 43% higher than the previous record of $1.7 trillion set in 2007.
That’s a dangerous sign as M&A activity has a history of peaking just before a market crash. It happened before the Great Recession in 2007, in 1999 before the tech bubble burst, and before the 1929 market crash that set off the Great Depression. Charts that Make the Case for a Stock Market Correction in 2016
High levels of M&A activity suggest that corporate insiders have little confidence in the ability to grow their businesses organically and instead have to resort to financial engineering.
Corporate insiders are dumping shares
The same corporate geniuses that have been using shareholder money to buy back stocks like mad are selling their personal shares like there’s no tomorrow. TrimTabs reported that corporate insiders sold almost $8 billion of their personal stock holdings in the month of November. That’s the highest level of insider selling since May 2011, right before an almost 10% market drop. Charts that Make the Case for a Stock Market Correction in 2016
All in all, the majority of the stock market is actually doing quite poorly. The number of stocks that have been moving higher is getting smaller. Narrow market leadership — when only a few stocks are going up and everything else is falling — is a clear sign of stock market trouble.
Combine this with the charts above and you’ll get a perfect recipe for the next stock market correction.