Low market breadth and divergence: there are fewer stocks rising versus ones declining, and a larger number of stocks are hitting the 52 week low than the ones hitting the 52 week high. Overbought stocks: such as AAPL, AMZN, MSFT, NVDA, and ARKK all have recently breached the 70 RSI overbought marker and are now dropping fast. This ties in well with the poor market breadth as allot of the money existing other stocks as they sell off is just pilling in few top stocks in an unstained way, hence the overbought flag. Reduced volumes: signal weakness in the market and provoke profit taking. For example the Russell 2000 average volume has dropped to just under 3 billion per day from a three months average of 3.7 billion. Incidentally this index tracks 2,000 small cap US companies which have been dropping for most of the last 3 weeks for a total decline of 7.3% thus far. Major trend line broken: for the second time in less than one month the S&P 500 has dipped under its major trend line. The first time on May 18th, it reversed and went back up on the back of decent labor and production reports plus earnings expectations. Now that earnings are underway and most economic indicators are pointing to growth peaking it might not be able to reverse the drop. Obviously all of the above are technical indicators that try to explain market behavior based on historical metrics, but they don’t explain the reasons behind such changes. We have to look at economic news to identify causes including: Peaking economic recovery: several reports this month point to an economy that has reached peak recovery. For example, both the services PMI 64.6 vs 65.2 vs 64.8 (actual, forecast, previous) and ISM 60.1% vs 63.3% vs 64.0% reports for June show a declining rate of expansion. Also, industrial production is showing similar pattern 0.4% vs 0.6% vs 0.7%. Mixed Q2 banking results: also point to the same issue above. While the overall figures are up, the details point to absence of loan growth and net interest margin weakness. Declining consumer sentiment: while consumer spending came in higher than expected for the month of June consumer sentiment declined from 85.5 to 80.8. The main driver behind this is inflation. Inflation rising: the FED has been harping on inflation being transitory because of the “base effect” and some temporary supply constraints. Their timeline for all of that to sort out was few months. Now it’s more than few months and inflation continues to rage registering the highest figures in over a decade with Core CPI (the Fed’s favorite metric) registering 0.9%, the highest increase since 2008. Furthermore, the PPI (producer price index) also continues to rise at a rate of 1% in June indicating that consumers are still going to see higher prices in the coming months and that overall inflation will overshoot the FED’s 2% threshold by a wide margin. Reemergence of a new variant: the delta variant is causing allot of lock downs and interruption throughout the world. While its effect in the US might be limited, a slowing world economy does not bode well for stocks in general, hence perhaps the reason why bonds have gone up. Bond yields going down: usually indicates that an economy is slowing and investors are looking for safer assists. Many have pointed out that bond yields usually peak 3 months in advance of the stock which they did in March. Since we are in July and bond yield continue to decline many think the bond market is sniffing out something and reacting to it. Remember, the inverse relation between bonds and yields. China’s Crack on tech: has rattled some investors especially that it came at a time when that market was showing sign of bottoming out. All of those events point to a possible correction sometime in the near future. Most experts expect that sometime after Q2 earnings, but it could be starting as we speak, especially that corrections don’t play out in one straight line. They tend to move in a series of several lower lows and lower highs until bottoming out. It’s important to also point out that a correction is not a market crash. Corrections are a much smaller event, ranging around a -10% drop on the low end for the leading S&P 500 index and much more for individual speculative stocks. They are a healthy event that helps reinvigorate the market with new buyers. A crash on the other hand is a much larger event that’s usually provoked by a combination of events or a single major event. Crashes usually last much longer than people expect, well past the initial large drop. There are several catalysts for such an event such as the emergence of a virus variant that outsmarts vaccines or a collapse in the reverse repurchase facility. The most prominent of them however, is QE tapering (quantitative easing) and increase in interest rates. Massive QE and low interest rates have been the driving force behind this bull market. They are the justification given for the current astronomical valuation where the S&P500 Shiller P/E ratio is reaching a whopping 38%! That is a historic high only second to the Dotcom bubble in 2000 (44%) and is in general an unsustainable level in the long term. Some argue that the FED will manage to taper QE and increase interest rates gradually in a very controlled manner and avoid any meltdown, but given rising inflation beyond expectations, the FED might very well be forced to act much sooner than it would like. Equities and bonds expert Ray Dalio explains this process in his most recent video on YouTube.notes from a user