Sell These "Safe" Investments Before They Crash
I keep track of indicators that often signal warnings before market crashes. In reviewing the current market, there are a number of sectors that seem to be in danger of a collapse. But most worrisome is that two sectors that are considered ultra-safe look set to crash.
It seems like after the strong year-to-date gains we've seen in the stock market, there should now be some high-risk stocks set up to fall. That is what usually happens after strong moves up. Instead, I was surprised to find a number of so-called safe-havens on the "crash-watch" list, and very few tech stocks or other high-fliers. This seems like the kind of thing we'd see right before the stock market takes off as it does to form a bubble top. While we might be able to get gains out of the stock market in general, there are two sectors that look as if they are breaking down and could hurt traders who allocate part of their portfolio to these investments.
The first sector is a traditional conservative investment: municipal bonds. Mutual fund investors have been flooding the municipal bond market with cash. Bloomberg reported that buyers have outnumbered sellers of muni bond funds for 18 straight weeks, investing $964 million just last week. Some of the buying is probably driven by the approach of the "fiscal cliff" at the end of the year, which would raise income taxes and make tax-free income more appealing. This is a $3.7 trillion market where many issues are insured against default, but I show more than 20 different closed-end municipal bond funds giving a crash signal right now.
These signals show up on the weekly charts, and were all given before we learned that Warren Buffett turned bearish on munis. Buffett's Berkshire Hathaway (NYSE: BRK-B) cancelled more than $8 billion worth of derivative contracts that insured buyers against muni defaults. That news indicates Buffett looks at munis as a risky trade right now with defaults likely to become a concern, and the relative strength index (RSI) confirms that.
The crash signal that so many municipal bonds are showing this week occurs when RSI breaks below the lower Bollinger Band drawn on the indicator. RSI is a momentum indicator and technical analysts believe that momentum moves ahead of the price. Bollinger Bands can be added to the indicator, which show when momentum is moving very quickly. If downside momentum accelerates sharply, then RSI will likely break below the lower Band and prices tend follow the indicator lower.
By design, these signals are rare and should only be seen about 3% of the time. When they cluster in one sector, it shows that something very unusual and bearish is going on in that sector.
Funds with bonds issued by California, New Jersey, New York, Maryland, Michigan and Ohio have all given a sell signal this week. These funds are thinly traded and could be difficult to short. For traders looking at profiting from a decline in this market, iShares S&P National AMT-Free Municipal Bond (NYSE: MUB) is a possible short, although there is only a small potential gain.