6 Charts That Make Me Terrified In This Shaky Stock Market – TheStreet.com

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Regular readers of my columns on Real Money might have noticed the subtle change in my bottom-line comments and strategies in recent days — more suggestions of taking profits, locking in gains, raising sell/stop protection and the like. As I look over the charts each morning, I find more and more individual stocks with parabolic moves that make me nervous.

You might say that experience or gut feelings don’t count for much in this algo/quant-driven market, but I disagree. I traded/invested a little bit back in high school, and without any sophisticated analysis, I went to cash in summer 1969 before I went off to college and didn’t re-enter the stock market until 1974’s fourth quarter. That means I basically missed the 1973-74 bear market.

I wasn’t smart, just lucky — but since that experience, I’ve found that I should never ignore my “gut.” It’s not perfect and I can’t back-test it, but it does have a long track record. And today, I want to present a few indicators, thoughts and observations that line up very well with my current nervous stomach.

Now, maybe you’ll find my commentary off-base after reading Ben Eisen’s Wall Street Journal article last week on how The Market Rally Is About More Than Just Apple and Amazon. Eisen even included an NYSE cumulative advance/decline-line chart (although he didn’t look at like a technician would).

So why don’t I like the stock market here? There’s no one reason in particular, but several clues that suggest this is a high-risk moment and a good time to reduce long exposure. Let’s check them out:

Price Momentum
This is a leading indicator that I’ve used for years, and it currently shows that momentum has slowed as the market has risen. In this weekly chart of Dow industrials, we can see that 12-week-momentum peaked in January and slowed down to the zero line in May:

And this weekly chart of the Dow transports shows how price momentum peaked in December 2016 and went negative in March, April and May:

Dow Theory
We also have a Dow Theory non-confirmation of the market’s positive trend.

The DJIA just scored a new record-high close on Friday, but the Dow transports haven’t yet confirmed that with their own record close. That isn’t actually a Dow Theory sell signal, but that might come later in the year.

On-Balance Volume
Now let’s look at the Dow’s On-Balance-Volume line (OBV).

In this DJIA chart, we can see the new high close — but we can also see the weekly OBV peaked in March and only shows a modest uptick from May into June:

Now, a declining OBV happens when the amount of volume traded is heavier on days when the DJIA closes lower. Heavier volume on a down day is a sign that sellers are more aggressive.

Next, we can see in this bar chart of the Dow transports that this index is well off of its early March peak, and over 200 points away from confirming the Dow industrials’ new high:

Also note the OBV line’s peak in late January and the modest increase since mid-May.

Bad Breadth
Another problem that I have with the market’s advance is its narrow or narrowing leadership.

Consider the Dow industrials. Only about a dozen of the Dow’s 30 stocks look like the overall DJIA right now. In other words, only around a dozen have been in uptrends and making new highs — 3M (MMM) , Boeing (BA) , Caterpillar (CAT) , Coca-Cola (KO) , Johnson & Johnson (JNJ) , McDonald’s (MCD) , Microsoft (MSFT) , Traveler’s (TRV) , United Technologies (UTX) , UnitedHealth (UNH) , Visa (V) and Wal-Mart (WMT) . The other Dow components are all in downward or sideways trend.

Compare that to the situation in October 2007. Back then, just eight DJIA stocks were in uptrends even as the index was making a new record above 14,000. Of course, we all know what happened next (although I’m not forecasting another 45% crash).

As for the broader market, a mere 15 stocks have accounted for about 40% of the market’s gains so far this year. That kind narrow leadership reminds of Wall Street’s “Nifty 50” era back in 1972.

In those days, the market’s leadership consisted of 50 hot stocks, including Coca-Cola, IBM (IBM) and McDonald’s, to name a few. These were called “one-decision” stocks because many investors believed that you could make money by just deciding to buy and hold them. But ultimately, that didn’t work out so well.

Advances vs. Declines
In this five-year chart of the NYSE cumulative advance-decline line, we can see that an uptrend dating back to 2015 has been broken, with the momentum study
slowing for more than a year:

It’s true that the AD line hasn’t peaked, nor has it turned lower to break its 200-day moving average line. But that could be coming soon.

Valuation
This is another risk facing the market.

Now, most technical analysts feel they shouldn’t talk about valuation, but I don’t feel that way at all. It’s true that valuation isn’t a good timing tool, but it’s worth covering anyway.

After all, some really smart, experienced fund managers, investors and analysts (from Warren Buffett to Ray Dalio to Larry Fink to Stanley Druckenmiller to Robert Shiller) have all waved warning recently flags about the market’s possibly lofty valuations.

Personally, I follow the research done by S. Kris Kaufman of Parallax Financial Research, who put the market at over 21% overvalued not that long ago. He reminded me the other day that the market was only 27% overvalued in 2000.

The Dow 4-Year Cycle
In this DJIA chart, we have a crude fitting of the four-year cycle along the bottom:

In the first two cycles to the chart’s left side, we see the cycle’s peak skewed to the right. But in the current cycle, it looks like the crest will be to the left — a sign that we’re losing steam.

The Market’s Mood
I’m a believer that the market has a rhythm, and sometimes a personality, and I’ve noticed that the market doesn’t appear to be rallying lately on what’s generally seen as bullish news.

I’ve also noted that the market has often been opening lower and taking all day to turn positive. Just a few months ago, the market would open lower but come roaring back after 30 or 60 minutes of selling.

Another subjective observation of mine is that it seems like everyone talking on CNBC, Bloomberg TV and elsewhere is bullish. I nearly fell over the other day while watching Marc Faber on TV. Everyone was polite and listened to his bearish case, but I doubt that anyone acted on it. But remember this old market saying: “When everyone is thinking the same, no one is thinking.”

Unlikely No. 7?
The so-called “Decennial Pattern” is based on research done by Edgar Lawrence Smith back in the late 1930s. This theory states that years ending in three, seven or and 10 are often down years.

When it comes to years ending in seven, we can think of 1907, 1917, 1937, 1957, 1977, 1987 and 2007 as those that featured nasty bear markets. But there’s also 1997, where the S&P 500 was up 31%. So, save this theory for a cocktail party for now.

The Bottom Line
I anticipate e-mails from readers telling me how wrong I am about the market, citing this reason or that.

I’m OK with that, but I’d still suggest that your review your holdings, cull out the names that aren’t working for you and become more sensitive about your remaining positions. Remember, it’s the weaker names that historically turn down first, while the strongest fight any downtrend.

And lastly, it behooves you to remember some advice I got at my first job out of college … “The higher a market goes, the less bullish you should become.”

(This column originally appeared at 9:05 a.m. ET on June 9, on Real Money, our premium site for active traders. Click here to get great columns like this from Jim Cramer and other writers even earlier in the trading day.)