Dow Jones, S&P 500 Set New Highs as Warning Signs Multiply

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Large-cap stocks notched another new record high on Thursday, pushing the S&P 500 up another 0.2% for its 25th consecutive day above its five-day moving average since the Oct. 15 market low. Meanwhile, the Dow Jones Industrial Average ticked up 0.2% to hit its own new all-time high.

Investors were excited by the surprise dividend hike at Intel Corporation (INTC), pushing the Dow Jones component up more than 4%, as well as a surge in the Philadelphia Fed’s manufacturing outlook to the best level since December 1993. That was enough to overcome overnight weakness led by disappointing factory activity metrics out of Europe and Asia.

In corporate news, Best Buy Co Inc (BBY) jumped nearly 7% on solid third-quarter results featuring healthy growth in margins, profits, and revenues. Two popular stocks, camera-on-a-stick maker GoPro Inc (GPRO) and coffee-in-a-pod maker Keurig Green Mountain Inc (GMCR), fell 9.3% and 7.4% respectively. GPRO is dogged by insider selling while GMCR disappointed investors with weak forward guidance.

The historically powerful and persistent rally seems unstoppable now, headed for the all-time record of 27 days set in March 1986. Long live the uptrend.

But the blemishes, if you know where to look, are spreading.

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The small-cap stocks in the Russell 2000, although rising today, are down over the last two weeks after hitting resistance from their September high which, in turn, was below its March and July highs. This dynamic is reflected in the ongoing disappointment in measures of market breadth such as the percentage of S&P 500 stocks in uptrends. This metric stands at just 71%, down from 76% back in September and 85% in July.

Wall Street insiders are growing more fearful as well, and looking for downside protection, as the CBOE Volatility Index (VIX) tested up to its 50-day moving average — which has historically delineated between stock market uptrends and downtrends — for the first time in three weeks.

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And despite the strength in the U.S. economy, it’s hard to dismiss the slowing underway overseas. Just look at the way European manufacturing and services sector activity is rolling over, as shown in the chart to the right.

Investors seem ill equipped to handle any disappointment, given extended sentiment and positioning measures. Wednesday’s Federal Reserve meeting minutes confirmed that 0% interest rates will end in the months to come. And President Obama’s executive action on immigration is sure to result in a new fiscal standoff with Republicans that could result in another government shutdown after Dec. 11 and another fight over the debt ceiling in March.

The last time we had the combination of a Federal Reserve operating without a bond purchase stimulus program (since the “QE3” program ended in October) and a partisan blood feud in Washington was in 2011, which culminated in the August 2011 market meltdown — the worst decline of the bull market to date — and resulted from the loss of America’s AAA credit rating.

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The result was a 20%-plus peak-to-trough decline in the S&P 500 from the June 2011 high to the October 2011 low. A similar decline now would take stocks back to summer 2013 levels and violate that long-term uptrend that’s been in place for more than three years.

Given the risks here, I continue to recommend investors adopt a more defensive posture with an increased cash allocation and a focus on areas poised to profit should market turbulence return. This includes the Credit Suisse AG – VelocityShares Daily 2x VIX Short Term ETN (TVIX) position that is up nearly 3% for Edge subscribers this month vs. the 1.9% month-to-date gain in the S&P 500.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/11/dow-jones-sp-500-stocks/.

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