Market expert Sven Henrich warns that stocks are preparing to end the year with a bang - but not the type which will make investors celebrate.
Henrich, who runs a subscription service and is not a professional money manager, explained to CNBC that the S&P 500 is trading in a "rising wedge pattern" — in which the market's narrowing range points toward a dramatic move.
"Wedges are very powerful patterns, and when they break, they have a fairly sizable implication," said Henrich, also known as the "Northman Trader." The rising wedge "demands a resolution in the coming months," he said.
For Henrich, "this pattern is likely to resolve to the downside. He points to a series of divergences, including the spread between insider buying and the S&P 500," CNBC explained.
At 2,127 as of Wednesday's close, the S&P is up about 225% from its March 2009 low.
"We can see a 20 to 25 percent correction into 2017," he said. "That's actually not a historically outrageous correction," added Henrich, who runs a subscription service and is not a professional money manager. "We just haven't seen it in such a long time that no one's used to it any longer."
Henrich is far from the only expert seeing warning signs in the market.
The changing relationship between bonds and stocks may be a sign of trouble ahead, The Wall Street Journal warns.
“A generation of traders have grown up with the idea that stock prices and bond yields tend to rise and fall together, as what is good for stocks is bad for bonds (pushing the price down and yield up), and vice versa,” the Journal explained.
“The relationship seems to have broken down in the U.S. Share prices and bond yields moved in the same direction in just 11 of the past 30 trading days, close to the lowest since the start of 2007,” the Journal reported.
Since Lehman Brothers failed in 2008, such a swing in the relationship has been unusual and suggests prices are being driven by something other than the balance of hope and fear about the economy, the Journal reported. Such a trend has tended to coincide with times of deep discontent in markets, notably the 2013 “taper tantrum,” when bond yields briefly surged after Federal Reserve officials signaled they would soon end stimulus.
“The simplest explanation is that expectations of interest rates being lower for longer—some central bankers have suggested lower forever—pushes the price of everything up, and yields down. When the focus is on the discount rate used to value all assets, bond and stock prices rise and fall together, creating the inverse relationship between bond yields and shares,” the Journal said.
“There is an alternative explanation for the breakdown in the U.S. equity-bond correlations. It could be that shares are tracking improving economic developments, while Treasurys are being driven by British, Japanese and European money fleeing super-easy monetary policy,” the Journal explained.
"It could be that this summer’s price moves were just noise while traders were on the beach, and stock prices and bond yields will start moving together again soon. But keep an eye on those correlations, as shifts often mean tough times ahead for investors," the Journal warned.
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