7 Strange But Telling Signs The Stock Market Is Due For A Sell Off

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This article was written by Jim Pearce, CIO of Baton Investing.
With the U.S. stock market at record highs after six years of continuous growth, investors are becoming wary of an impending market correction. They're looking for ways to protect themselves and their money from a crash. While there is no way of knowing when a correction will occur, industry experts can provide us with insight. Here are seven signs that a correction is coming from Jim Pearce, Baton Investing's Chief Investment Officer.

#1. Your Uber driver is day-trading the stock market while waiting at a red light.

This is a strange, telling sign that doubles as a true story. In fact, not only was the Uber driver day-trading the stock market, he was -– until recently –- an executive officer with a solar energy company. A steep drop in oil prices has disrupted the economics of alternative energy sources to the extent that many firms are downsizing and shutting down plants until oil prices get back up above $80 per barrel.

#2. A company that doesn't make anything and is free to use becomes the 10th most valuable publicly traded company in the United States.

That company would be Facebook, which moved ahead of Walmart earlier this year when its total stock market capitalization reached $245 billion. Think about that for a minute. Facebook
FB
is now more valuable than long time blue-chips stocks such as IBM
IBM
, General Electric
GM
, and Verizon Communications
VZ
. The company is 12 years old and has been trading publicly for only a few years, yet is considered a safer place for your money than companies that consistently generate huge profits and pay high dividends.

#3. Your son drops out of college to become a bond broker because "That's where the real money is made!"

Millennials want to get rich now, so they don't see the point in spending any more time in school than they have to. Bill Gates dropped out of Harvard to start Microsoft, and so did Mark Zuckerberg to launch Facebook. The tech world has always been populated by free-thinkers. But with so much stock market activity the result of programmed trading, the "techies" are seemingly again taking over Wall Street.
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#4. The Chinese stock market drops 25 percent in less than a month.

While the rest of the world was watching the Greek debt crisis play out, the Chinese stock market was imploding to very little fanfare. After peaking on June 12 at 5,166 the Shanghai Composite Index plunged to 3,507 on July 7th, a decline of 32 percent in only three weeks. And despite recovering to 4,124 thanks to aggressive stimulus policies out of Beijing, the market stumbled back down 3,663 earlier this week. Analysts are concerned that these losses may trigger a similar collapse in China's housing market because many investors mortgaged their homes to generate investing cash.

#5. Warren Buffett concludes his most recent shareholder letter by saying, "This time I wish the stock market really would close for the next five years!"

Mr. Buffett has also said that his favorite holding period for a stock is "forever", and it may take about that long for stocks like Netflix
NFLX
and Amazon.com
AMZN
to become profitable enough to justify their current valuations. Ultimately, the price of a stock is supposed to reflect the present value of its future cash flows to investors. But since so many of these so-called "momentum" stocks do not pay any dividends, the only future cash flow may be whatever you can sell it for to the next person willing to pay even more for a company that generates very little profit. This is sometimes referred to on Wall Street as the aptly titled "Greater Fool" theory.

#6. During the largest presidential debate ever held, all 35 declared Republican presidential candidates vowed to undo the serious "harm" done by the Obama administration over the past five years -- such as the stock market doubling in value, and the unemployment rate declining by 4 percent.

Regardless of your political persuasion, it is difficult to argue that things have not gotten better economically under the Obama administration. But a new Republican president may feel compelled to implement a very different fiscal agenda, at the risk of destabilizing the delicate balancing act that has resulted in the United States being the only major nation to discontinue its Quantitative Easing program and declare its intent to begin raising interest rates later this year.

#7. The United States does something like signing a nuclear proliferation agreement with Iran.

Although this does not directly impact the stock market, it's no secret that anything that is perceived as being disruptive to the global economy -- such as escalation of tensions in the Middle East -- can dissuade investors from staying in the market. Let's hope Mr. Obama turns out to be correct about this deal being the best way to avert armed conflict with Iran. But if he turns out to be wrong, we could see a real mess unfold that could take years to reign in. There is a big difference between a stock market correction, which is limited in both duration and magnitude, and a crash, which can be severe and long lasting. In fact, a correction can be the ideal time to build a portfolio of quality companies that have become oversold.
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Posted In: Short IdeasOpinionTrading IdeasAmazon.com Inc.FacebookGeneral Electric Co.IBMNetflix Inc.Verizon Communications Inc.
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