The Daily Prophet: Red Flags Keep Popping Up in the Stock Market

Remember when all investors had to worry about were sky high stock valuations and complacency? Those were the good old days of last month. Now, it seems that almost everywhere you look there are signs that equities are on shaky ground.

Take the Dow Jones Transportation Average. Loaded with railroads and airlines -- and sometimes called the market's early warning system -- the benchmark largely outperformed the Dow Jones Industrial Average in the months after Donald Trump's election victory. That was generally seen as a good omen. Since peaking on March 1, though, the transports have underperformed, dropping 6.48 percent, versus a 2.48 percent decline for the industrials. Then there's the S&P 500 High Beta Index, which tends to tends to lose momentum faster than the broader market at the tail end of an uptrend. That gauge has reached a wall of resistance, failing to break above its 50-day moving average. Without a breakout, it's unlikely that stocks at large will gather much momentum, according to Bloomberg Intelligence's Gina Martin Adams.

With geopolitical risks seemingly on the rise around the world and measures of volatility creeping higher, it's no wonder stock investors are being cautious. Former U.S. Treasury Secretary Lawrence Summers said that while it’s difficult to call a market top, valuations have gotten ahead of the economy. “I’m not sure that I see what in the economy would justify a market move of the magnitude we’ve seen in the last months,” Summers said in an interview Wednesday on Bloomberg Television. “It wouldn’t surprise me if people look back and see that there was a bit of a sugar high in some of the valuations that we’re seeing.”

IF IT COULD HAPPEN IN THE U.K. AND THE U.S., THEN ...
Europe is a perfect example of what Summers describes. With less than two weeks to go before the first round of French presidential elections, investors are racing to protect gains that have pushed the region’s shares to their highest prices in more than a year. The cost of hedging against declines in the Euro Stoxx 50 Index has surged to its highest level since the U.K. referendum on European Union membership, rebounding from near a 15-month low in just a little more than a week, according to Bloomberg News' Justina Lee. While the independent candidate Emmanuel Macron and the euroskeptic Marine Le Pen are still leading in surveys ahead of the April 23 vote, far-left candidate Jean-Luc Melenchon is gaining ground, stoking concern the presidential race will be close. After last year’s unexpected Brexit vote and Trump's victory, investors are wary of being caught off guard again, “The polls have become less reliable, and that perception is weighing on market sentiment,” said Daniel Murray, the London-based head of research at EFG Asset Management, which oversees about $20 billion.