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Warning: Stocks Likely to Crater From Here

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We should all be watching the behavior of the major indexes here, because the possibility of a major triple-top failure is quite high.

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I don't relish the job of constantly pointing out the risks to the equity markets. But since few on Wall Street seem willing (or able) to do this, I'm "making the call" for a market correction, as enough variables have aligned to indicate a high likelihood of stocks heading downwards from here.

I've only given one other such warning about equities before, and that was in March of 2008, when I warned of the possibility of a 40% to 60% decline in stock prices by fall. I am making a similar call today, with the understanding that I am usually a bit early to the game with my views.

Before I get into the details, the broad outline is that I see a case where speculative fevers, propelled by the Fed's $85 billion thin-air money printing program, have more or less run their course, with the Dow (INDEXDJX:.DJI) and S&P (INDEXSP:.INX) indexes stalled near their all-time highs. That is, $85 billion a month is what it takes to merely keep the Dow near 14,000 and the S&P 500 near 1,500.

(Also read Should We Ignore Stock Research From Big Bank Analysts?)

On a fundamental basis, I see numerous signs of consumer weakness, political in-fighting and paralysis in DC, high insider selling, and the return of the retail investor (a.k.a. "greater fool") to the stock market.

On a technical basis, there are numerous telltale signs of a market top, including too much bullish sentiment, waning momentum on multiple timeframes, and too many NYSE stocks being above their 200-day moving average (at least until recently; that's begun to correct).

(Source)

Triple Top

The S&P 500 and Dow Jones are both once again near all-time highs…for the third time. The old saying third time's a charm can work both ways when it comes to the stock market. Sometimes an index will bust through to new highs, and other times it will fail spectacularly crashing to new lows.

We should all be watching the behavior of the major indexes here, because the possibility of a major triple-top failure is quite high, for reasons outlined below.

(Also read Chart of the Day: This Year's S&P Performance Might Look Familiar So Far, But...)

If the S&P 500 fails at the triple top and breaks down, from a charting perspective the next thing for it to do is revisit the bottom and then make up its mind as to what it wants to do next. The implication here is that a major failure of the S&P 500 will open the possibility of it revisiting the 600-800 level, or some 45% to 60% lower from the 1,500 level where it currently churns.

It will take some time to get to that level, typically three to six months, unless there's some sort of financial accident to hasten things along, in which case it could all be over in a month or two.

Assuming a failure at the triple top, we'll just have to watch and see what the market wishes to do once it plumbs the bottom once again. For now, the daily and weekly charts of the S&P 500 show waning momentum, and the weekly chart remains in overbought territory (green lines and circles):

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No positions in stocks mentioned.

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