MDY SPDR S&P MIDCAP 400

Late Wednesday afternoon, after watching the Dow Jones Industrial Average rocket some 154 points, Altitrade Partners™ issued two new reports to warn investors that the U.S. stock market was approaching dangerous territory.  Altitrade Partners™ came to their conclusion based on a number of indicators that the firm watches, which have recently begun to flash warning signs.

The reports, which appear on the Seeking Alpha web site, are titled Follow The Yellen Brick Road, But Watch Out For Lions And Tigers And BEARS (Oh, My!) and Why Any Stock Market Correction Could Be Fast And Furious.

We wrote the articles because we saw evidence that investors were simply continuing to ignore a number of indicators that historically have pointed to market tops and the probability of a stock market correction, said a spokesperson for the firm, based near Denver, Colorado.

A number of these concerns have been building over the summer months, and in the past few weeks we saw a number of additional factors that caused us great concern. The IPO market has been frothy and prices of some recent offerings such as GoPro (GPRO) have tripled from its initial price of $24.00 just a few months ago.

We addressed this concern, specifically, in a report titled The Alibaba IPO Will Usher In The Beginning OF The End Of This Great Bull Market, also published on the Seeking Alpha web site back on September 9, 2014.

The euphoria in the IPO Market along with general investor complacency about the overall stock market lead us to believe that the four most dangerous words on Wall Street “It’s different this time” have crept into the investor psyche.

There also remains a belief among the investing class that the end of QE3 will not have any significant impact on financial markets. The consensus thinking among the Wall Street crowd is that the Federal Reserve’s upcoming change in Quantitative Easing policy has already been discounted and factored into equity prices, since they had telegraphed their intentions ahead of time.

We take the opposite view on whether or not the Fed’s next moves will effect stock prices. We have had six years of Federal Reserve intervention, which has created a great liquidity bubble. Most of that excess liquidity found its way into the financial markets (stocks and bonds) and real estate (housing).

We find it difficult to accept the idea there will not be an impact on those asset classes which have benefitted the most from being the recipients of this great liquidity, once it ends.

The last two times the Federal Reserve changed their stances on Quantitative Easing, the markets experienced drops of 9 percent and 11.65 percent.

The fact that just about everybody on Wall Street believes that the end of QE3 has already been fully discounted into equity prices tells us that the opposite of what many think will happen. Too many people leaning to one side of the ship will cause it to list, and ultimately sink. Consensus thinking NEVER works in the stock market."

Valuations are also stretched, and are a problem for the U.S. stock market. The Shiller Cyclically-Adjusted Price-Earnings Ratio (CAPE) is currently at a reading of 26.5, which is 59.6% higher than the historical mean of 16.6.

There have only been three other periods in stock market history when the CAPE was higher than it is today; September 1, 1929 when it was at 32.54, December 1, 1999 when it registered an all-time record reading of 44.19 and September 1, 2007 when it stood at 26.73.

Another troubling sign is a metric that Warren Buffett follows. The Buffett indicator, as it is known, is currently at 127.2, meaning that the total market cap of U.S. equities is 127.2 percent of the U.S. economic output as measured by Gross Domestic Product. This number is more than two standard deviations above its historical mean of 68.6 going back to 1950.

Altitrade Partners™ expects stock prices to trend lower during the next few months. Typically this time of year tends to show seasonal weakness, so we have history on our side in that respect, the firm acknowledged. We believe that we could see a significant move downward, in terms of magnitude and velocity, based on the factors which we have outlined in a number of our reports, since July, said a spokesperson.

Investors need to look at all factors, and assess what changes they might need to make in order to mitigate the risks of what a declining stock market may mean to their overall financial health. The last thing that an investor wants to do is give back a substantial portion of the gains realized over the past few years.

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