Beware: Bull market flashing warning signs

Published Mon, Jun 1 201511:25 AM EDT

Calling a top in the bull market is a way to go broke quickly or lose your job if you're a Wall Street strategist. Big rallies usually find different reasons or a different combination of the old reasons to end. It's usually never the same. That may be even more so the case for this six-year bull market as record stimulus from the Federal Reserve causes what appears to be excesses to be larger and last longer than during past tops. Still, many strategists are starting to sound the alarm as past bear market signals begin to mount. Things like big merger activity and a record rise in borrowing to buy stock are giving many pause. New cash takeovers came in at a monster $83 billion last month, the highest since May 2007, according to TrimTabs Investment Research. This follows a record annual period for corporate matchmaking in 2014. While this is a poor way to time a market top, it is worth noting that every economic recession was preceded by a wave of mergers like we're seeing right now. Said Brian Kelly of BKCM in a note Monday morning about the chart above: "Since 1916 there have been five distinct mergers waves, all of which have ended with a recession. This begs the question should investors be wary of the recent spate of mergers or does it signal more runway for the stock market. Unfortunately, the answer is not as clear as we all might like. ... Given the recent weak economic data, the odds favor this M & A wave signalling a recession is closer than the markets and central bankers are anticipating." The latest figures on margin debt from the NYSE and FINRA for May show that $550 billion is being borrowed to purchase securities, according to Alan Newman's Crosscurrents newsletter. This amounts to 3.1 percent of U.S. gross domestic product, surpassing the 3 percent level at the top of the technology bubble and the highest level since 1929, according to the newsletter. "That we have been able to exceed that stage of madness bears testament to yet another mania in progress," wrote Newman in his monthly missive. Again, this isn't a great market timing tool, but it is worth noting that past heights in stock borrowing marked some bull market tops. Read More Value investor says earnings recession is coming The other factor traders are chattering about frequently is a breakdown in the charts of many individual stocks, or the so-called market internals. This has yet to stop the S & P 500 from posting record close after record close this year, but simple math dictates it will eventually. For example, of about 800 of the U.S. market's biggest stocks, just 60 percent were above their 30-week moving averages last week, down from more than 70 percent in April, according to Jeffrey Weiss of Clearview Trading Advisors. Translation: There are fewer stocks in a bull market uptrend, threatening the overall bull market's positive trend. "While we still lack the evidence to suggest the bears have captured the market's primary trend and key trend lines haven't yet been pierced, we still think the market could use some work here," wrote Weiss. These bearish voices are still hard to hear above the bullish chanting on Wall Street, which in itself is another sign of a bull market top. The money play: If the bull is ending, Newman believes it could be time for gold to catch up to stocks. The strategist tracks over time the ratio of the Dow Jones industrial average to the price of gold. From the removal of the gold standard to the start of the technology bubble in 1994 that ratio was about 6-to-1. Right now, the Dow is more than 15 times the price of gold. So going by this indicator, either stocks should fall in a major way or gold should rally . Newman thinks it will be a little of both and is long bullion.

Adam Jeffery | CNBC

Calling a top in the bull market is a way to go broke quickly or lose your job if you're a Wall Street strategist.

Big rallies usually find different reasons or a different combination of the old reasons to end. It's usually never the same.

That may be even more so the case for this six-year bull market as record stimulus from the Federal Reserve causes what appears to be excesses to be larger and last longer than during past tops.

Still, many strategists are starting to sound the alarm as past bear market signals begin to mount. Things like big merger activity and a record rise in borrowing to buy stock are giving many pause.