Wall Street expert Louise Yamada warns that if the Dow Jones Industrial Average is thought as of a wall of 30 bricks, it’s “integrity is challenged” and a big drop could be looming.
The widening gap between the Dow Jones transportation average and the Dow Jones Industrial Average could mean a steep correction in the very near future, she told CNBC.
"It's the concept of 'Dow Theory'
in which the companies that make the products and the companies that transport them are supposed to move in tandem," said Yamada, founder of Yamada Technical Advisors. "Most of the time they do, but the transports have broken support and now we are seeing a kickback into that resistance."
The transports have dropped 8 percent this year while the industrials have gained 1 percent.
"Unless the divergence is eliminated, the risk of decline is pretty consistent," she said.
“Of the Dow stocks, there are about seven or eight that are in distribution phases, and if you think of the Dow as a wall of 30 bricks, as you have more and more bricks dropping out, eventually the integrity of the wall is challenged," said Yamada.
"It's quite possible that we will get something in the range of a correction which is defined at 10 to 20 percent down from the high."
Other experts are also wary about the markets, with one notable economist equating them to a time bomb.
While massive central bank easing has created huge pools of liquidity in the financial systems of developed economies in recent years, liquidity in their financial markets has shrunk, notes economist Nouriel Roubini of New York University
And that paradox carries ominous implications, he writes in an article for Project Syndicate.
"This combination of macro liquidity and market illiquidity is a time bomb," he warns.
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