Unemployment is Ready to Rise

Unemployment is set to increase very soon.

Although the recovery in jobs has been stronger than most realize or are willing to accept, it's about to reverse. Rising unemployment is coming (and so might a recession).

The employment situation has been better than most realize or are willing to accept. According to the unemployment numbers, we've seen slow but steady growth in jobs. The Unemployment Rate is much lower than it was in 2008 and 2009, at the height of the Great Recession.

Source: FRED

Source: JP Morgan

Unfortunately as it relates to Unemployment, it always looks brightest right before it turns for the worse. When unemployment it at or near decade-lows, it tricks us into thinking that the economy is certainly doing well. The economy does in fact grow and improve as the Unemployment Rate falls. However, the closer we get to the "turning point" or decade-low, the higher the probability that economic growth is about to reverse course.
In other words, Unemployment has dropped so much that this could be the best we'll see. 5% Unemployment is not bad! We should be happy that the US figured out how to keep unemployment low. But, if Unemployment is about to rise, that likely also means that economic growth is slowing.

If you look at the long-term chart of Unemployment Rate, you can see that a significant multi-year (even multi-decade) bottom in the Unemployment Rate preceded almost every single Recession since 1948 (Recessions shaded grey):

Another signal pointing to higher Unemployment is the major difference between the "Seasonally-adjusted" and "non-Seasonally-adjusted" Unemployment Rate numbers.

The government agencies like to "seasonally-adjust" official numbers in order to "smooth" out results and/or remove unjustified deviations due to catastrophes, one-time events, or season-related trends. This results in much smoother, less volatile results over time - as can be seen in the long-term Unemployment Rate charts.

Non-Seasonally-Adjusted:

Seasonally-Adjusted:

Most of the time, both the Seasonally-adjusted and Non-Seasonally-adjusted numbers trend in the same direction. But when they don't, a major trend change could be underway.

In our case, while the "Seasonally-Adjusted" Unemployment Rate made a long-term low of 4.9% last month (January 2016), the "Not-Adjusted" Unemployment Rate rose significantly to 5.3%!

Seasonally-Adjusted:

Not-Adjusted:

Both adjusted and not-adjusted numbers have moved together, but have now diverged. 

At the same time, Initial Jobless Claims have just bounced off 3-month lows and are off their 5+ year lows:

Unless the economy or jobs situation has improved over February, it looks like we could see an increase in Initial Jobless Claims and the resulting increase in Unemployment Rate.

Remember $2 Gas?

Enjoy the cheap $2 gasoline while you still can!

Due to the collapse in crude oil, gas prices have reached lows not seen since the depth of the Great Recession. But these extreme lows in oil and gas prices won't be here for long.

                                              Gas Prices

Crude oil and gasoline prices have moved largely in unison, both up and down:

Crude Oil vs. Gas

Oil prices are at lows not seen in years, decimated over the past 2 years and crashing by nearly 80 percent to $26/barrel since the ~$110/barrel highs in June 2014.

   Crude Oil Prices

Possible Reasons for the Bear Market in Oil & Commodities

1) Huge oversupply due to more effective drilling technology and domestic self-sufficiency.

2) Slowing economic growth around the world (Europe, China, Brazil, etc), leading to lower energy demand.

3) Deflation, where the prices of nearly all assets fall. Usually accompanied by economic recession and stronger US Dollar ($UUP).

4) Over-speculation in the Energy ($XLE) space, as is apparent by the exposure of energy companies in the Junk Bond market ($HYG) ($JNK).


What's Next?

The magnitude of oil's collapse was far greater than I had expected or even assumed possible. Though I clearly stated my expectations of oil dropping significantly due to the large deflationary forces and slowing global economic growth, I didn't think crude oil would fall by more than 50 percent. Oil was definitely not staying at $100/barrel, but $30/barrel? That's crazy cheap. 

Still, caution must be exercised, as a continued decline is not out of the question.
However, even though oil and energy can continue lower, the largest price drops are already behind us. Oil is a much better investment than most other assets because it has already been crushed, and the bad news is mostly or completely priced-in.

Oil is now "over-hated", as oil prices ($USO) and energy company valuations ($XLE) have been severely (and excessively) cut. Most investors are running away from Energy or are still too afraid to get in.

Contrary to most investors, oil and energy is a major bargain right here.
Now is the time to look at Energy investments.
Now is the time to pick up the scraps left in the wake of oil's collapse. 

There are definitely troubling times and even bankruptcies for some of the energy companies ($CHK, $UPL $LINN, etc.), but it's time to search for the viable companies selling for dirt cheap.
Even if some of your Energy investments get wiped out, some of these companies are golden opportunities for exponential returns (think 300-1000%+).

The outcome of the Oil Recovery and higher energy prices is both positive and negative:

On the positive side, investing in oil and energy is presenting a very rare opportunity to buy at the bottom near 20-year lows.
On the negative side, rising oil prices will result in higher fuel costs. You can probably forget about the extremely cheap $2/gallon Gas prices.

Even worse, those who neglect to invest in Oil and Energy now are likely to lose twice - once by missing the long-term bottom in oil, and once by having to pay more at the pump.

In a few years we will be talking about how low oil & gas prices were.
Oil prices are close to what they were in the 1980s and 1990s.
Now is the time to invest in oil.

The Zombie Trend

Is it not obvious that CNBC & The Walking Dead plagiarized my article?

• I wrote an article about Zombies and the Stock Market / Economy in November 2012. 
• I sent the link to the creator of the TV show, AMC's "The Walking Dead", Robert Kirkman.
• I was (separately from this) interviewed by CNBC's Maria Bartiromo.
• A few months later, Robert Kirkman is on CNBC with Maria Bartiromo to discuss the connection between Zombies and the Stock Market / Economy.  

Watch the short video, then read my article, and tell me this isn't a bit "suspicious".


November 2012:
















March 2013:

See CNBC: “‘Walking Dead’: Zombies Thrive on Weak Economy”

In November 2012 I wrote the article below, titled "Investing In Zombies".
I had been a big fan of zombie movies for years, and I knew zombies were about to get very popular again.

Until then, zombie fans like myself were largely disappointed by the lack of both quantity and quality when it came to zombie movies. It was rare to see a well-written, well-produced, well-received zombie movie; most were low-budget films that only true zombie fans could even tolerate. Of course, there are the "zombie classics" and other favorite zombies movies, but they are few in comparison to the multitude of zombie movies and TV shows that have been released over the past few years.

We have just lived through and witnessed one of the biggest waves of zombie popularity in history, perhaps for years to come. #1 watched TV shows, mega-studio films, zombie costumes, zombie 5k races, zombie economies, zombie video games, etc etc.
There is still some time left in this "zombie trend", but the highest peaks of popularity are already behind us.

We've seen the massive popularity of Vampires, then Zombies. What's next? Ghosts? Aliens? Werewolves? Evil Robots?



Investing In Zombies
Originally published: November 13, 2012

http://seekingalpha.com/instablog/763684-chartprophet/1254481-investing-in-zombies

Many stocks and companies may be at the end of an uptrend and are becoming "dead money", but investing in the "living dead" and the strengthening popularity of the Zombie theme could be a profitable opportunity.

With The Walking Dead as this fall's most popular television series, and with AMC Networks (NASDAQ:AMCX) reporting earnings this Thursday November 7th, is it a good investment? Moreover, with Viacom (NASDAQ:VIA) behind a potential blockbuster hit zombie movie coming out in 2013, and with Activision (NASDAQ:ATVI) soon releasing two hugely profitable zombie games, is now the time to buy?

Below, I will make the case for (1) Why zombies are the new craze, (2) How they are replacing vampires as the more popular theme, and (3) What companies you can invest in to profit from the growing trend.

Why Zombies?

Zombies represent how the world economy has been behaving and how a lot of people currently feel about the future. Zombies are slow, mindless, physically-decaying, and brutal beings with no long-term goals, no productivity, no sign of recovery, and no desires other than eating human flesh. Unfortunately, the economy and stock markets have behaved very similarly over the past 10+ years, or "Lost Decade": We've seen huge ups and downs, instability, massive turmoil, increasing risks and dangers, unfathomable events, and the collapse of much of life as we once knew it. In fact, the similarities have been so staggering that we've seen the emergence of some very popular nicknames: "zombie economy", "zombie banks", and "zombie debt" among others.

Obviously many things have greatly improved over the years, but all the volatility and chaos of multiple recessions and never-ending uncertainty have truly eaten away at people's confidence. Most investors just can't understand what's happening. Even the top business executives, politicians, fund managers, and experts have no clue what to do!

In a zombie economy, there is a self-perpetuating sense of doom - the feeling that there is no solution; that the sickness is unstoppable and the predator unkillable; the fear that even those in command have little idea how to fix things.

CNBC - Why_Zombies_Are_Taking_Over_the_Economy

So why zombies? Because all of the fear, dread, and impending doom that people are feeling about the economy or personal safety. The solutions seem to escape us, the situation doesn't appear to be improving, and it feels as if everyone is either fighting to survive or preying on the weak. To many, the world feels like a harsh, dangerous place with a bleak future; it is precisely when people feel this fearful or discouraged that zombies have the most appeal.

Zombies vs. Vampires: The Triumph of the Zombie

Unlike the decaying, numb, and senseless zombie, the vampire stands for beauty, immortality, and conscious pursuit of power (though it still uses evil methods to get there). The positive characteristics of a vampire are therefore a lot more appealing when people are feeling more positively about themselves or their situation.

It is no surprise then that the two most popular vampire television shows (Buffy The Vampire Slayer and HBO's True Blood) and the most popular vampire novels and movies (Twilight) of the past 20 years were started during very positive periods for the economy.Buffy came out in 1997, as the US was at the height of its most impressive bull market ever; True Blood was developed in late 2005, near the height of the housing bubble (it made its television premiere during the recession in September 2008, but only months after the all-time peak in stocks); and the Twilight novel was released in 2005, also near the height of the housing bubble (the massively successful movies were released in 2008-2011, but well after the novels had already become best-sellers).

According to a Google books (NASDAQ:GOOG) search comparing the frequency of the words "zombies" and "vampires" in books, "vampires" have been the clear winner by far from 1940 to 2008, with an increasingly sharper rise since around 1987:

But I am happy say that vampire popularity has finally peaked. With the most successful books, shows, and movies now behind us, vampires can no longer outdo themselves. Yes, they will one day come back in a huge way, but the cycle is on its way down. When 13-year-old girls become completely obsessed with vampires (as they have with Twilight), the trend is over. It is now time for zombies to take control.

A simple indication of the soaring triumph of zombies over vampires is visible in a Google Trends search:

When we plot all of the search volume for the terms "zombies" and "vampires" since 2004, we can see how zombies have completely dominated since late 2008. While "vampires" was the more popular term for most of 2004-2008, "zombies" has skyrocketed upward since late 2008 and has massively led "vampires" since early 2009. We can see the big increase in "vampires" due to the Twilight success in 2010, but "zombies" is the runaway winner.

Rising Zombie Popularity

The growing popularity and success of the zombie theme is evident in best-selling comics and books, a top-rated television show, an upcoming blockbuster movie, zombie video games, a 5k "zombie race", and even a warning from the CDC (Center for Disease Control and Prevention - a governmental organization) about a "zombie apocalypse".

Perhaps the clearest sign of the growing zombie popularity is the hugely successful television show, The Walking Dead. The show, already into its third season, is so popular that its premiere in October 2012 was the highest-rated entertainment series this fall. It was already the most successful cable drama of all-time, but the Walking Dead premiere was even more popular than all of the big broadcast entertainment shows including ABC'sModern Family. Only football and live sports are more popular than zombies right now.

The Walking Dead television series is based on the bestselling comics written by Robert Kirkman. The books have been selling so well that (as of November 6, 2012) Kirkman is #26 in Amazon's (NASDAQ:AMZN) top 100 authors! He has probably been even higher up.

Moreover, he currently has two books in Amazon's top 100 bestseller list:

Before The Walking Dead, author Max Brooks published two bestselling books about zombies - The Zombie Survival Guide (2003) and World War Z (2006).

Brooks' books have been so popular that Brad Pitt's production company, Plan B Entertainment, secured the movie rights in 2007. Brad Pitt will star in World War Z (set to release on June 21, 2013), with The Zombie Survival Guide set for a 2014 release.

We are yet to find out if the movies are even good, but with superstar actor Brad Pitt starring in an upcoming zombie movie, we can safely say that the zombie theme is going strong and may have much more room to go.

 

In fact, the number of zombie movies released each year has soared since 2000:

And in comparison to the stock market:

Source: Wired Magazine

Such rapid growth in popularity is a bit disconcerting, but aside from The Walking Dead we are yet to see true blockbusters in the zombie category in this cycle. We've seen big success in zombie-like movies such as Resident Evil (2002), 28 Days Later (2002), and I Am Legend (2007), but I think we are still not at the peak-level vampire equivalents likeTwilight and True Blood.

Running away from zombies has even become a fun 5k race, as participants run and scale an obstacle course while avoiding the zombies that attempt to take their life, or in this case the flags on their belts:

runforyourlives.com

Even the Centers for Disease Control and Prevention (NASDAQ:CDC) warned about a "zombie apocalypse". In a shocking public campaign by a governmental organization, the CDC urged people to be prepared for zombies. Why?

"If you are generally well equipped to deal with a zombie apocalypse you will be prepared for a hurricane, pandemic, earthquake, or terrorist attack." So please log on, get a kit, make a plan, and be prepared!

-Dr. Ali Khan, CDC Director

CDC.gov

How To Invest

Zombies have been estimated to be worth over $5 billion to the economy. Between movies, video games, television, comics, books, novels, Halloween costumes, merchandise, and other items, the zombie category is both far-reaching and very lucrative. So with zombies probably getting even more popular in the next few years, here is how you can cash in:

1. Zombie TV: The Walking Dead. Perhaps the most popular within the zombie theme is the #1 show The Walking Dead. Already the top-rated entertainment series on TV this fall, the air-time for commercials during the show have been fetching between $200,000 and $375,000 - more than the top primetime shows. The biggest winner from this is AMC Networks , the network that owns the AMC, IFC, and Sundance channels. AMC goes well beyond zombies, with IFC and Sundance being the top independent film channels. Even more, AMC also features top shows Mad Men andBreaking Bad.

Those who would like to profit from The Walking Dead can look at AMC Networks as a potential investment. However, while its shows have been hugely successful and its ads have been selling for a lot of money, AMC Networks is not necessarily a strong buy. The company has a $3.5 billion market cap, decent growth numbers, and very strong future catalysts; but its PE ratio is relatively high at 22.5, it has a lot of debt ($2.28 billion), and its stock has already seen a nice run in the past four months.

AMC is reporting earnings on Thursday November 8th, which could send the stock price up even more. AMC could benefit from the $700 million settlement that it won together with Cablevision (NYSE:CVC) against Dish Network (NASDAQ:DISH), when Dish removed AMC's channels from its service. However, because the stock price is already at the top of the upward sloping "channel" seen in the chart above, together with minor divergence in the Relative Strength (RSI), I'd rather be more cautious here and see what comes of earnings. A small position would be smarter here, but waiting for a pullback could prove to be safer and more profitable.

2. Zombie Movies: World War Z. With Brad Pitt starring in the upcoming movie World War Z, betting on the potential blockbuster hit could be a very smart move in anticipation. Unlike The Walking Dead which is already a big hit and may already be factored into AMC's stock price, betting on World War Z now will make you one of the first to do so.

So how do you do it? World War Z will be distributed by Paramount Pictures, a subsidiary of Viacom . Investing in Viacom, then, could be the best way to profit from a potential future zombie hit - especially when it stars Brad Pitt. Viacom is a powerhouse, and runs MTV, VH1, Nickelodeon, CMT, BET, and Comedy Central. There are obviously a lot of good things going for it, then.

On a weekly chart, Viacom looks a bit dangerous. It has sharply reversed down from a recent peak, it is far above its 200-day moving average at $40.64, and its relative strength (RSI) and momentum (MACD) indicators are still pointing down:

On a daily chart, however, Viacom looks like it is approaching a pretty good buying opportunity after sharply falling from over $57 to $50 in just a month. The relative strength and momentum indicators are still negative, but for those looking to buy, $50 and $47-48 are pretty good low-risk buying opportunities at support. Viacom also pays a 2% dividend.

3. Zombie Video Games: Call of Duty and The Walking Dead. The best way to profit from the zombie genre is probably through the gaming industry. Luckily, there is one company that is far and beyond the number one force behind the zombie games.

Activision Blizzard is THE player here. Not only is Activision Blizzard behind the bestselling games World of Warcraft, The James Bond series, The Amazing Spiderman, and the upcoming Diablo and Starcraft, but ATVI is the company behind the Call of Duty series and the upcoming The Walking Dead video game.

Call of Duty has been one of the top video game series of all-time, and since 2009 has included a "zombie feature". Black Ops II will be coming out on November 13, 2012 and is expected to be a top-seller. Even more, Activision is expecting the release of The Walking Dead: Survival Instinct in 2013. Both of these games combined spell major profits for Activision .

Activision looks pretty good financially, with a $12.32 billion market cap, a 15.8 trailing PE, $3.19 billion in cash ($2.87 per share), zero debt, and a 1.6% dividend.

When it comes to the charts, there is both some opportunity and some risk. In the long-term chart, we can clearly see ATVI's massive run since 2000. In 2008 it took a very big hit, losing over 50 percent of its value. Since then, it's been in a sideways trend and appears to be in the midst of choosing a direction. It may have broken below its long-term uptrend, but $10 and then $8 should be decent support levels.

The daily chart looks a bit better. Though we are still below the 50 and 200-day moving averages, it appears that ATVI could have bottomed for now near $10.80 and may begin a new uptrend. The momentum is diverging and signaling more positive price movement ahead. If prices can break above the 200-day moving average and the downward-sloping trendline near $12, ATVI looks very good.

Conclusion

With the massively growing popularity of zombies, and their increasing success over the vampire theme in recent months, investing in zombie-related companies could be highly profitable.

I personally have been a huge fan of zombies and apocalyptic movies almost my entire life. Is it not fun and exciting to imagine worst-case scenarios and how you would find a way to escape or survive? Maybe it's just me, but I think that playing out multiple situations, and mentally planning what you would do, applies to much more than just escaping zombies or avoiding a worldwide pandemic. In reality, the ability to be well-prepared for all kinds of scenarios could help improve your relationships, protect your investments, and even save your life!

Watch your back, protect your investments, and buy companies that benefit from the zombie craze. I think we're only in the early to middle stage of the Mania Phase in zombies.

How To Predict The Next Recession - (Update: Uh-Oh)

Based on what I said almost 2 years ago, are we now in a Recession?

This doesn't mean a Recession is a MUST under these circumstances, but that a Recession is POSSIBLE and perhaps LIKELY.

Also, even in the case of a Recession, it is likely to be mild-to-moderate rather than severe.

Still...this doesn't look good!

How To Predict The Next Recession

Originally published: July 22, 2014
http://seekingalpha.com/article/2330345-how-to-predict-the-next-recession

Summary

Markets continue higher despite a multitude of huge risks & warning signs.

Historically, we are due for a 10%+ correction or even a recession.

However, we will likely not see a recession unless 6 key indicators are triggered.

How To Predict The Next Recession

The stock market's rise and global economic growth will continue as long as 6 key indicators are not triggered.

Despite a long list of major risks to the global economy, the trend for the stock market is still UP until proven otherwise. At this stage it is absolutely critical to be cautious and watch for signs of a market correction or peak, but it is our view that a recession won't take hold until 6 key indicators are triggered.

The stock market (NYSEARCA:SPY) has continued higher in the face of economic uncertainty, global deflationary threats, an emerging market slowdown, a European recession, Middle East upheaval, increasing Russian aggression, political stalemates, and a never-ending supply of doubters. However, even with the multitude of reasons to question the viability of the economic recovery, the market rally goes uninterrupted - without a 10% correction in over two years!

Though many are anticipating the inevitable correction, the market's rise may persist regardless of the underlying risks. The market's job, after-all, is to prove most people wrong; and if that is the case, it is only when the majority of bears give up that the market will "unexpectedly" fall.

While even I anticipate a large correction and even a recession over the next 1-2 years, we can continue investing so long as the upside momentum is intact. There are a few great investment opportunities right now and a multitude of incredible shorting opportunities coming within the next months. Until our 6 key indicators are triggered, a recession is not yet confirmed.

6 Signs of Impending Recession

1) Copper under $3.

As we've mentioned a number of times over the past few years, copper is a major indicator of the health of the global economy.

Why do we think copper is so important? Firstly because copper is a major commodity used heavily in many industrial settings and signals economic growth or contraction. Secondly, copper and the stock market have moved in direction so closely that their wide divergence since 2011 is a huge puzzle and may be a huge hint.

Since copper is so strongly tied to manufacturing and economic growth, falling copper prices are an early hint as to the future direction of the stock market. In fact, falling copper prices were an early warning before the May 2010 correction and the 2011 crisis and slowdown. Now, as seen above, copper prices are struggling to stay above $3 and even broke below $3 for a very short time earlier this year. If copper prices fall below $3 again, a major stock market correction or even global recession could be near.

2) Oil under $100.

Similar to copper, the price of oil also signals the health of the economy as well as the inflationary situation. As seen below, crude oil has not made a new high since early 2011. We actually predicted in 2011 that oil prices would not break out to new highs for at least a few years, and worse - that the falling oil prices were signaling a broader global economic slowdown in Europe, China, and emerging markets. Slower growth and weaker inflationary forces lead to lower oil prices, and oil found strong resistance at $110/barrel. Stuck in a range between ~$75-110, oil is at a critical turning point - it must choose between a breakout above $110 toward new highs or a breakdown below $75 toward the decade lows. However, since $100 seems to be a very important level where a lot of the price action has gravitated to, we view the $100 level as critical support. If prices fall below $100, and especially $90-95, the economic recovery could be in question as deflationary (and recessionary) forces take hold.

3) Apple (NASDAQ:AAPL) can't sustain new all-time high.

I am beyond shocked that Apple has made such a huge comeback after falling by 40% from its 2012 high. Our view is that Apple will never be as dominant and enormously exciting as it was in the past; we believe that Apple's best days are behind us. However, after cleaning up its blunders and attempting to establish investor enthusiasm via an upcoming product pipeline, a dividend, and a stock split, Apple has managed to make it back to all-time highs. It is at these levels where the truth about Apple's future and its effect on the overall stock market may emerge.

If you agree that the best, most exciting, and most innovative days for Apple are mostly behind us, AAPL is likely a poor investment choice. At this point in its business growth cycle, most of Apple's future success has been factored into the stock price and Apple is much more likely to disappoint, miss earnings estimates, or fail to live up to expectations.Going forward, it is not a stretch to predict that Apple may undergo a decade of stagnancy and loss of market share as Microsoft (NASDAQ:MSFT) experienced in the decade following the Dot-Com technology bubble. Poor management decisions, angry customers, and growing competition are just a few potential outcomes that generally follow one of the most epic success stories of the past century.

But Apple's stock price affects more than just Apple. It is the #1 largest company in the US by market cap, at over $500B; it has a huge weighting in the Nasdaq 100 and S&P 500; and it is highly-owned by both individual investors and large funds and institutions. A drop in AAPL therefore has much broader implications for the overall market - if AAPL suffers, many investors and funds could suffer as well and the stock market indices could be significantly impacted. As Apple now stands at all-time highs, now acting as major resistance, the continuation of the rise in the stock price is crucial for the performance of the overall market. If AAPL can't sustain new highs and continue higher, the entire market rally may be in danger.

4) Junk Bonds (NYSEARCA:JNK) falling.

The last place you want to be invested during a recession is Junk Bonds. So long as the economy is improving and borrowing remains cheap, even the weakest companies can survive and pay off their debts. It is no surprise, then, that one of the hottest investment themes since the end of the recession in 2009 (and a big hedge fund favorite) has been "junk" bonds and distressed debt. They pay higher interest to investors than risk-free US government bonds due to their much higher risk (though the junk bonds' ~5% yields are now near record lows due to such massive demand).

However, there is a reason why they call them "junk" bonds - they are bonds of some of the lowest-rated and financially-weakest companies. They were great investments coming out of the recession since the financial and economic situation was so terrible at the lows. But as the rally has continued, and as we approach an inevitable correction or recession, the major risks in junk bonds is magnified.

What happens when an economic contraction, financial hardship, or rising interest rates materialize? The companies which will likely suffer the most are those with the weakest financials. There is a reason why investors have so much faith in "safe" and financially-strong companies: They are much less likely to fall apart due to debt burdens or liquidity concerns. That is not the case with junk bonds, whose companies are some of the least-prepared to deal with a slowdown. Any financial shock can easily undermine the entire company's solvency. If a correction or recession ensues, junk bonds can plummet or crash. These companies may not be able to pay their debts, and many of these junk bond issuances can become worthless.

Yet junk bonds are not only important in and of themselves. Their performance also tends to signal the direction of the overall stock market:

In the above comparison of junk bonds [black] vs. the Dow Jones Industrials Average ($DJI) [blue], it is very clear that the rally in junk bonds has accompanied the rise in the stock market. Furthermore, it is highly noticeable that the stock market corrections since the 2009 bottom have also coincided with corrections in the junk bond market. The May 2010 BP Oil Spill, the 2011 financial crisis and European recession, and the following smaller market pullbacks have all seen corrections in junk bonds as well; sometimes junk bonds even lead to the downside and give an early warning indicator of the upcoming stock market drop.

To make matters worse, since mid-2013 junk bonds have severely lagged the stock market and have formed a large divergence in performance. The stock market has continued sharply higher but junk bonds are weakening. Moreover,while the stock market is still at all-time highs, junk bonds appear to be rolling over. If junk bonds continue their slide, there is a very high probability that the stock market will follow. And if junk bonds see a severe correction or crash, it is highly likely that a number of large financial institutions could be in danger or even insolvent.

5) M2 Money Supply shrinking.

The money supply is one of the key indicators of our growing or shrinking monetary base - a clear picture of the effect of monetary policy, money printing, and the devaluation of currency.

Paying attention to the money supply (published by the central bank) is highly important, since it could signal underlying changes in inflationary outcomes.

Monitoring changes in the money supply is very important due to its effects on price level, inflation, and exchange rates. The "Quantity Theory of Money" suggests a strong, direct relationship between the growth in money supply and long-term inflation.

In fact, while the US has undertaken a very loose monetary policy with low interest rates, the M2 monetary base has grown tremendously. Note the extraordinary growth in M2 since 1980 and especially over the past 5 years.

So long as money supply continues to grow, the Fed's easy monetary policies continue to support increasing asset (and stock) prices in an attempt to create the desired inflation. But there is a limit to how long such low interest rates and money printing can continue - political backlash, major financial risks, and the growing ineffectiveness of these policies stand as powerful opposition to this trend.

Since the money supply is (theoretically) highly correlated to inflationary pressures, any slowdown or decrease in money supply could be an early indicator of an upcoming economic slowdown or recession.

Just take a look at how the monetary base has grown by 400% since the 2008 recession (mostly due to Quantitative Easing [QE] and low interest rates):

It is clear that the huge increases in money supply have greatly supported the rise in the stock market. However, we may be approaching a tightening cycle that results in a shrinking monetary base. If that is the case, an economic slowdown or stock market correction may be upon us as deflationary pressures build. But first we need a confirmation - if the Monetary Base or M2 Supply shrinks consecutively for a 2-4 week period, a recession could be weeks or months away.

6) Dow Jones Industrials Average under 17,000.

It is crucial that the stock market (Dow Industrials) stays above 17,000 if the rally is to continue. Yes, it is going to be hard to remain at elevated levels, especially in the case of a 10%+ correction. However, the 17,000 level was a major milestone and new all-time high. We can therefore draw our "line in the sand" at 17k and make that our critical support level. 17,000 may not be the EXACT support level (it could very well be 16,800 or another close number), but by focusing on a defined level - and especially an easy to monitor round number - we can greatly improve our risk management. To put it simply: if the market falls below 17,000 we turn very cautious, but if it stays above 17,000 we are comfortable investing with the trend.

As you can see above, the stock market has seen huge ups and downs since the mid-1990s. Clearly visible are the 1999-2000 Dot-Com technology bubble peak, the 2007 housing peak and ensuing 2008 recession, and now - the 2014 all-time highs. We have broken above the top rising trendline, but we must hold these levels in order to ensure stability. It is not unreasonable to expect some sort of sideways movement, correction, or even crash at some point within the next few years.

Though we have only recently broken above 17,000 on the Dow Industrials, it is now a very important support level. As a very easy to track, logical, and psychological support level, 17k is our key indicator of future market direction.If the market stays above 17,000 we can continue to believe in the upward trend; but if the market drops below 17,000 we turn very cautious.

Conclusion

The second quarter of 2014 was largely a continuation of the same themes and concerns of the past few years: The stock market rising in the face of so many underlying risks, and a lot of investors and market participants expecting a 10%+ correction. Market jitters have escalated this year over the perceived overvaluation of momentum technology and biotech stocks, as well as the weakening performance of small-cap stocks (represented by the Russell 2000 index).

So far, the stock market has consistently overcome a number of scary moments and potential de-railers of the economic recovery. And though the risks of a major correction are growing every single day, the Fed is still supporting markets, the employment situation continues to improve, and China's economy looks much better than it did a year ago (though these may reverse at any moment). The economy is on the verge of a sustainable, self-feeding recovery; but if it doesn't catch hold soon, a new recession is not unlikely. Recession doesn't mean a major market crash, but falling stock prices are probable. However, until we see confirmation of a slowdown or peak, we can follow the uptrend and just keep our eyes open for the clues.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions.