Nothing good lasts forever, including the amazing bull market that investors have enjoyed this year.
Fueled by ultra-low interest rates, solid corporate earnings and a Federal Reserve that says it will do whatever it takes to jump-start the economy, stocks have been breaking record after record as they surge higher. The Dow Jones Industrial Average has rallied more than 1,800 points since Jan. 1 -- and money keeps pouring into the market.
But I have noticed five specific clues that are pointing toward an end to this extremely bullish market cycle.
1. Headline risk
When you start seeing the media boasting about how great the stock market is performing and how everyone is getting involved, it's time to be extra cautious.
Over the weekend, I came across bearish signals from two distinctly different places: a Wall Street Journal article titled "Mom Pop Run With the Bulls," and a cab driver who offered me stock tips.
While traveling down Fifth Avenue in downtown Manhattan, the taxi driver overheard me talking stocks on the phone and offered his favorite companies -- and even a few trading tips.
It is amazing how much everyone thinks they know about the market and trading. It's said on the Street that once you hear the shoe shiner, barber and cabbie talking about the market, it's a sure sign that bullish trends are coming to an end.
No one knows for sure, but I am certain there are several former hedge fund managers driving New York City cabs right now, so maybe my stock-picking cabbie managed a $100 million short-selling fund last year. Who knows?
When I see this type of behavior in the stock market, it gives me flashbacks to "Black Monday" crash during the late summer of 1987, when the writing was on the wall. The Dow Jones Industrial Average dropped 22.61% in one day -- its largest decline in history.
2. Global uncertainty
There seems to be another crisis arising in the eurozone every day.
First, it was Iceland's financial crisis, Spain's bailout and then Greece's extreme debt issues. Now Cyprus is actually seizing bank accounts to pay its national debts, as I mentioned recently.
While we may feel insulated in the United States, the worldwide financial system is interconnected to a surprising degree. What's next in the eurozone? Will Italy or an even larger nation reach out for help?
It's possible the United States will eventually be asked to step into the fray to assist. This is a very real concern and may weigh heavily on the stock market, should rumors even begin. In addition, growing tension from North Korea may also soon bring pressure to the stock market.
3. Higher interest rates
Although Federal Reserve Chairman Ben Bernanke has assured investors he will not consider raising interest rates until the unemployment rate drops to 6.5% from its current 7.6% -- which isn't expected to happen until 2015 -- growth in payrolls or a jump in inflation may trigger an increase.
In addition, the Fed could start cutting back on its massive bond-buying this summer should the economy continue to pick up steam. The extremely bullish effects of the Fed's $85 billion monthly purchases in Treasury bonds and mortgage-backed securities is pushing down interest rates and encouraging businesses to hire.
John Williams, president of the San Francisco Fed, has expressed optimism in the plan.
"I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer. If that happens, we could start tapering our purchases then," Williams has said. If this occurs, then it will have dire effects on the bull market.
4. Too much risk-taking
Risk-taking is exploding in today's market.
Remember, excessive risk is what led to the financial crisis in 2008, and it can easily happen again. More than $150 billion in junk bond debt has been issued in the first quarter. If the warnings of a bond market bubble bursting turn out to be accurate, then high-yield bond investors could suffer massive losses.
5. Another housing bubble
The housing market has been rebounding since late 2012 and has been naturally expanding since hitting rock bottom. In addition, the Fed's low-interest-rate policies have greatly helped the growth.
But reports from Washington say the Obama Administration is encouraging further growth by directing banks to lend to risky borrowers.
Yes, this is exactly what caused the housing bubble crash, and it will repeat, should consumer debt loads become unmanageable once again. Adding to this worry is the 6.4% growth of household debt in the fourth quarter of 2012 -- the biggest jump since 2007.
Risks to Consider: While these five points are signals the bull market may be topping out, no one knows for certain when or if a pullback will actually happen, and there's no telling how sharp it may be.
Action to Take -- While there are still great investments available, it's good to exercise caution as the markets reach new highs and the economy begins showing similar signs seen during the months leading up to the prior financial crisis.
By: David Goodboy
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