The 30 percent plunge in silver prices over the past two weeks could be an early warning signal that there’s something going wrong in the markets. I’d even go so far as to say it’s starting to look like 2008 out there. That’s got a lot of investors moving into defensive positions, and that doesn’t bode well for stocks. Here are five signs that it might be time to lighten up your portfolio:
1) New margins on the CME. Changes in initial margin requirements for Comex silver futures have gotten most of the press. A series of recent hikes drove silver margins up 84 percent in just 8 days. What’s gotten slightly less press is the news that the CME Group didn’t limit their margin hikes to silver alone. Margin requirement for crude oil climbed from $6,750 to $8,438 on Tuesday, May 10. The United States Oil Fund LP ETF (NYSE:USO) is down 12 percent since the start of the month. “Increases in margin requirements have a history of triggering selling,” David Kotok, the Chief Investment Officer at Cumberland Advisors, writes at FinancialSense. Kotok noted that his fund is raising cash on the heels of the CME Group’s “game-changing” margin hikes.
2) Bullish on healthcare. It’s always a bad sign when investors start moving into healthcare stocks. Like utilities, the sector is one of few that consumers can’t cut back on when times get tight. Consider this: of the 10 S&P sectors, healthcare has performed the best this year. It’s up 14.9 percent, per Reuters. A lot of people with a lot of money apparently see signs that it’s time to get defensive.
3) The end of QE2. The Fed’s still doing its best to inject more money into the economy with QE2, but we all know that program’s due to end next month. When it does, the cash sloshing around in the stock markets could dry up quickly (just as it did at the end of QE1). Credit Suisse expects at least a 10 percent drop in equities at the end of QE2, according to Reuters. Value investor Jeremy Grantham’s calling for a 30 percent drop in stocks.
4) Weekly Leading Index. The Weekly Leading Index (WLI) from the ECRI (Economic Cycle Research Institute) is closely watched by professional traders thanks to its ability to forecast economic growth. In recent weeks, the WLI has flattened and slowly started edging downward – most recently from 6.6 percent to 6.4 percent. It’s an indication that economic growth is slowing. If regional manufacturing reports due out this week from New York and Philadelphia confirm the trend, the bears could again take the upper hand. And they just might as manufacturers suffer with higher input costs thanks to rampant energy inflation.
5) The debt ceiling debate. For all the drama surrounding the debt ceiling debate, I think Washington realizes they’re truly jeopardizing faith in the dollar. If the ceiling isn’t raised, it would be tantamount to a default on U.S. debt; something that even the most hard-line Tea Party member should realize isn’t a good thing. Even Speaker of the House, John Boehner (R-Ohio), has said as much: “They’ve pushed the date back, pushed the date back, pushed the date back. But it’s clear to me that at some point we’re going to have to raise the debt ceiling.” That should alleviate short-term fears of a bond default, and – coupled with the end of QE2 – move investors back into bonds and the dollar.