7 Red Flags Tell Us Why The S&P 500 Could Be Going Down to 865

The market seems to have run out of buyers. Recently, on days when the market goes up, the volume is light. On days when the market goes down, volume soars with passionate intensity.

The babbling heads on TV make the bullish case that corporate profit margins surged to 36% in the first quarter which is the highest since records began in 1947 and that, meanwhile, bond yields are pitifully low. As such, there is no better place to put your money than in the market’s leading stocks [- they say].

Maybe so but let me give you a run-down on seven things that worry me and, I think, explain why many investors aren’t willing to buy this recovery anymore.

7 Red Flags
I think the seven red flags below indicate the next big move in the market may be down.

#1) Chinese Growth is Slowing
An index of leading economic indicators in China rose by the smallest gain in five months in April. Since the world is counting on China’s go-go GDP to drive the global economy, that is a worrisome sign. Also, the Shanghai Composite Index recently hit its lowest level since April of last year. The Chinese aren’t feeling very bullish.

#2) Mortgage Purchase Applications are Down
The mortgage purchase index has collapsed to near a 13-year low following the expiration of the tax credit and that suggests that home sales will fall sharply too. Home sales are a gauge of consumer confidence. People don’t buy homes if they don’t feel confident. Speaking of which …

#3) U.S. Consumer Confidence is Plunging
U.S. consumers are increasingly worried about jobs and the economy, according to data from the Conference Board. Its consumer confidence index plummeted to 52.9 in June — the lowest level since March — from a downwardly revised 62.7 in May. What are people worried about? The future state of the economy and jobs, jobs, jobs so let’s look at jobs …

#4) U.S. Employment Continues to Lag
Payroll company ADP said private employers added just 13,000 jobs in June. That’s well short of the 60,000 economists polled by Thomson Reuters forecast. Sure, earlier this month, the government reported that nonfarm payrolls grew by 431,000 in May but the bad news is most of the new jobs were temporary jobs at the U.S. Census. Private employers weren’t hiring.

#5) Impact from BP Spill Continues to Grow
BP’s leaking “Well from Hell” in the Gulf of Mexico has economic as well as environmental impact. Louisiana’s fishing industry and oil industry is getting hammered. Florida’s $60-billion-a-year tourism industry is in danger. Texas is getting hit, too, because many of the deepwater oil rig crews live in that state.

In just the oil industry alone, pessimists estimate the drilling ban could cost all parties involved — companies, workers and support personnel — about a billion dollars a month. The optimists figure the cost is about half that. Either way, it’s a huge hit to the economy and as long as the well isn’t capped, the damage will continue to grow.

#6) Massive Budget Crunch Coming for America’s States
According to a new report from the Center on Budget and Policy Priorities, U.S. states in fiscal 2011 could be facing the worst budget situation since the recession began in 2007.

Since all states except Vermont have to balance their budgets, that means states are going to have to slash payrolls. This will worsen an already tough economic climate. Previously, states looked to the federal government to see them through tight budgetary times, but this time, Republicans and enough Democrats have united to say “no” to more federal money for state payrolls.

#7) The “Easy Money” Days May Be Behind Us
Governments around the world are tightening their belts. The G20 group of nations met in Canada recently, and pledged to slash deficits in half by 2013. The markets floated higher on a flood of easy money — if that flow of government money is drying up, markets could head lower.

Charts Suggest Tipping Point May Be At Hand
They say that stocks “discount the future.” Well, the future they’re discounting right now is lousy. Across the major markets — the Dow, Nasdaq, and the S&P 500 — we are seeing chart action that indicates the rally may be ending and a tipping point may be coming up.

S&P 500 Low of 865 Anticipated
It may be that all the [current] bad news is priced into the market as the bulls are saying or, [on the otherhand,] maybe the bad news we’ve seen already is a harbinger of more bad news to come. [Frankly,] I think the bearish case is more likely. If this breakdown in the S&P 500 occurs, it would give us a target around 865. That’s a big move lower, and would tie in nicely with forecasts for a “double dip” in the economy.

4 Ways to Protect Yourself and Your Portfolio

1. Own Gold
If you haven’t already, start putting a small portion of your wealth in physical gold bullion — and silver, too. It will help safeguard you against the hard times that could be coming.

2. Consider Funds That Let You “Short” the Major Indices
Short funds aren’t for everybody, but they can function as a hedge for a portion of your portfolio.

3. Leveraged Shorts If You Have an Appetite for Risk
There are funds that also track two or three times the inverse of the S&P 500 or other major indices. You have to be careful with these — have an exit point as well as a mental stop in mind BEFORE you put one dollar into this kind of fund — but if you have a stomach for risk and an appetite for larger returns, a leveraged inverse fund may be for you.

4. Put the Right Stocks in Your Core Portfolio
I believe there are stocks that will likely hold up better than most on the way down and lead the charge on the next leg up. On the one hand, I like companies that pay big, fat dividends. They outperform in every recession — even bad ones. After the 1929 crash, it took the Dow Jones Industrial Average 25 years to get back to even but at the same time, an investor who invested $100K and reinvested dividends would have seen his portfolio grow to $431K — a return of 331%. On the one hand, I like gold and silver miners.

Conclusion
If you’re in the market, you can’t just sit and hope things work out. You have to be proactive and prepare for the worst as well as the best – and now is the time to take action!

*http://www.uncommonwisdomdaily.com/red-flags-on-the-economy-9690?FIELD9=1 (Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. To view archives or subscribe, visit our web site.)

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