Now that stocks have finally started to pull back from record highs investors are probably asking themselves, 'is this a standard correction or something more than that?' I believe we are in the process of forming a major top and here's why:
The purpose of this article is to help traders and investors understand the clues and psychological characteristics that often precede a market crash. No one can predict the day or time, but if you pay attention, you can recognize the signals.
It is important for strength to persist, and for reflation expectations to continue to turn up. Should our inflation rotation models sense a change in underlying tone, there is a chance we rotate into bonds. It is for this reason that next week is pivotal. Historically, emerging markets have had many 5%+ weekly up moves. As algorithms begin noticing an end to US momentum and a start to emerging market strength, it will likely become a self-fulfilling momentum trade that very few will see coming.
Bullish sentiment is rampant, the CBOE Volatility index (VXX) is bumping along its recent lows, and price/earnings ratios for stocks are entering high, if not nosebleed, altitudes. That makes things ripe for a decent correction after a surprisingly strong summer rally.