A Big Warning Sign Is Flashing

Some of you may be familiar with the 200-day moving average ("DMA"). This indicator is considered a rough gauge of the market's long-term trend.

During bull markets, stocks tend to spend most of their time above the 200-DMA. During bear markets, they spend most of their time below it. And perhaps most important, stocks rarely stray too far from this line in either direction before returning to it.

The following chart of the S&P 500 Index shows how it works. As you can see, since stocks moved back above this trendline following the financial crisis in 2009, they have rarely traded below it...

You'll also notice that whenever stocks have rallied significantly above this line, they have eventually come back to "test" it – touching it or even moving below it briefly – before continuing higher.

Which brings us to today...

Right now, the S&P is nearly 12% above the 200-DMA. And it hasn't "tested" it in more than a year.

This is unusual... In fact, the market has only been this stretched above the 200-DMA three other times since the rally began. And each of those cases preceded a sharp correction over the next few months.

As always, we never recommend making investment decisions based on indicators alone. And like the RSI extreme we mentioned earlier, this is not a precise market-timing tool. Today's extreme could become even more extreme in the near term.

But history is clear: It's simply a matter of time before the market returns to its 200-DMA. And like a rubber band, the further it stretches, the sharper that move is likely to be.

Again, none of these warning signs are a reason to panic...

As we've discussed, several other indicators continue to give the "green light" today. This suggests the next correction is likely to be another buying opportunity rather than the start of a true bear market.

But even if  a serious crisis is approaching, selling your stocks now could be a terrible mistake...

Now... I've done my best to show you the macro framework as I see it... I hope you understand why it's particularly important this year. But honestly, it really shouldn't matter all that much to your investment strategy.

Why not? Because you can't know if I will be right and a bear market will develop soon. And even if I'm 100% right, you could still easily make your biggest gains of this cycle in the final few months of the bull market.

In other words, even if there is a bear market and even if the markets as a whole end up down for the year, you could still make a lot of money by simply following your trailing stop losses and hanging on as long as you can.

So while I think you should be aware of these macro risks... and while I believe they're even more important this year than they have been in more than a decade... I think it's far more important that you simply follow sound investing principles, rather than try to time the market.

Oil Is Too Expensive

Is it time to sell oil? Is the recent rise too bubbly? Can it rise even more? Well, it can rise more, but it is too frothy at the current moment. 

Last week, West Texas Intermediate ("WTI") crude – the U.S. benchmark for prices – passed $63 for the first time since Porter issued +his warning in 2014.

The latest highs followed news that U.S. oil inventories fell for the eighth straight week. They now sit at their lowest level since August 2015.

While this suggests that OPEC's plan to reduce the global glut has been working better than expected, there are now signs that it may have gone too far.

Most important, at current prices, almost all U.S. shale producers can earn a profit...

So we'd expect to see both production and "hedging" to lock in higher prices begin to ramp back up. And that's exactly what has happened...

The oil "rig count" – the number of rigs actively drilling for oil in the U.S. – has been rising again. U.S. firms added 10 oil rigs last week, for a total of 752 active rigs, according to oil-services provider Baker Hughes. That's the biggest weekly increase since last June.

Meanwhile, news service Reuters notes that U.S. shale firms added more than 144 million barrels of oil to their hedges over the last quarter. According to the U.S. Energy Information Administration, this all but guarantees total U.S. production will rise to a new all-time record of more than 10 million barrels per day this year.

But that's not the only reason for concern...

Today, traders are incredibly bullish on oil again.

Regular Digest readers are familiar with the Commitments of Traders ("COT") report. This report is published weekly by the U.S. Commodity Futures Trading Commission, and shows the real-money bets of futures traders across dozens of asset markets.

And according to the latest COT report, speculative traders are now more bullish on crude oil than ever before in history.

As we often say, if there's one constant in the financial markets, it's this: Popular investment ideas are usually losers. Whenever the "crowd" is heavily betting one way, it's often a good time to take the other side of that bet.

In short, we now have similar conditions to those that led to the last plunge in crude...

In its quest to stabilize the market, OPEC has thrown a lifeline to even the most troubled U.S. shale firms. They can now ramp up production again – thanks to hedging – continue to produce even if prices begin to fall.

Meanwhile, speculative traders have gone "all in" on oil, and will likely rush for the exits at the first sign of trouble.

It's a near-perfect recipe for lower prices.