Signs of a market top are popping up everywhere.

As you probably know, the S&P 500 set a new all-time high in early July…its first since May 2015. Normally, it’s a bullish sign when an index like the S&P 500 sets a new high. But U.S. stocks didn’t keep rising after “breaking out.” Instead, they’ve fallen.

Just take a look at the chart below. You can see that the S&P 500 has fallen nine days in a row, its longest losing streak since 1980. It’s now below the high it reached in early July. That’s not a good sign.

But it’s not the only major warning sign. Earnings for companies in the S&P 500 have also fallen for five straight quarters. That’s the longest earnings drought since the 2008–2009 financial crisis.

Stocks almost never rise during such prolonged periods of declining earnings.

• To be clear, we aren’t saying the market has topped…

Only fools make calls like that.

We’re saying it looks like the market’s topped. And it would be just as foolish to ignore these red flags.

Today, we’re going to tell you another reason why we think stocks may have peaked. This same warning sign flashed before the last two major stock market crashes. That’s the bad news.

The good news is that you can still make money (possibly triple-digit returns) in the coming months if you make the right moves today. We’ll tell you how to do this at the end of today’s issue.

But before we get to that, let’s take a close look at this new warning sign.

• Last month set a record for deal-making…

Bloomberg reported a week ago:

October as a whole was a record month for dealmaking, with almost half a trillion dollars of mergers and acquisitions announced globally.

CenturyLink Inc.’s $34 billion acquisition of Level 3 Communications Inc., as well as General Electric Co.’s deal to combine its oil and gas division with Baker Hughes Inc., pushed October’s deal volumes to about $489 billion, according to data compiled by Bloomberg. That’s the highest amount for at least 12 years, topping the previous record of $471 billion in April 2007, the data show.

• You might not think this is a big deal…

After all, what’s so bad about companies buying each other?

But mergers and acquisitions (M&A) activity spiked before the last two major stock market crashes…and that has many Wall Street analysts worried. USA Today reported last week:

October's frenzied deal activity has caught the eye of analysts who note that similar bursts of corporate M&A activity in 1999-2000 and 2006-2007 occurred near stock market tops.…

The robust M&A activity is sending up a yellow flag, as the past two times deal activity has spiked in a cluster of back-to-back years was in the run-up to the 2000 dot-com stock crash and 2008 financial crisis.

As you may recall, the NASDAQ plunged 78% during the dot-com crash. The S&P 500 fell 57% during the 2008–2009 financial crisis.

• Most companies don’t buy other companies when business is good…

They buy other companies when their business is struggling.

You see, a company can make itself bigger, practically overnight, by buying another company. And that can boost sales or profits.

That’s the reasoning behind the biggest deal proposed this year…

As you’ve probably heard, telecom giant AT&T (T) offered to buy media powerhouse Time Warner (TWX) for $85.4 billion two weeks ago.

According to The Wall Street Journal, AT&T hopes the blockbuster deal will help the company grow:

In the U.S., AT&T lost 268,000 mainstream wireless phone customers. Phone additions are considered important because they provide more service revenue than tablets, and customers with postpaid phone accounts tend to stay longer.…

In all, AT&T’s total wireless revenues dipped 0.7%, to $18.2 billion, which the company blamed on decreases in service and equipment revenue.…

The Time Warner deal is seen helping AT&T potentially find new areas of growth as its core wireless business has become saturated and its share of the mobile market leaves little room for acquisitions.

• AT&T isn’t the only major U.S. company that’s used M&A to grow…

Bloomberg reported last week:

Just eight transactions account for more than $300 billion of the October total as megadeals continue to find favor among dealmakers.…

So far this year, 32 deals valued at more than $10 billion have been struck. That puts 2016 on track to beat every year since 2007 except for last year, when a bumper 52 transactions of that size or more were announced.

Given that corporate earnings have been falling since 2014, it’s safe to assume that companies are using M&A to offset the poor performance of their “core” business.

• We see the recent spike in M&A activity as a major red flag…

But many investors don’t see it this way. That’s because takeovers can boost a company’s profits…at least in the short term. And that can lift a company’s share price.

Legendary investor Carl Icahn thinks those investors are making a big mistake. Icahn, who has one of the greatest trading records ever, warned last year:

[What companies] do with the money is almost perverse. They just go in and buy another company to show analysts on Wall Street that their earnings are going up so their stock will go up. It’s financial engineering at its height.

Icahn is specifically referring to “cheap money.” He added:

[I]t’s like taking a drug, borrowing money very cheaply, taking over another company. You feel good. It’s like steroids. The athlete’s jumping pretty high. And so those companies can show a huge EBITDA number that we all know is not going to be there in two or three years.…

So, these earnings are fallacious.

• You see, the Federal Reserve has held its key interest rate near zero for the last eight years…

This has made it incredibly cheap for companies to borrow money.

According to the Securities Industry and Financial Markets Association (SIFMA), U.S. corporations have borrowed $9.1 trillion in the bond market since 2010. That’s 55% more than they borrowed in the seven years leading up to the 2008–2009 financial crisis.

Companies have racked up huge debts even though corporate profits have been falling since 2014.

And now, corporate balance sheets are weaker than they were during the last financial crisis. The Wall Street Journal reported last month:

Median debt at junk-rated companies is five times earnings before interest, taxes, depreciation and amortization, or Ebitda, according to Moody’s data. That compares with 4.2 times in 2008. The debt ratio for investment-grade companies is 2.6 times Ebitda, compared with 2.2 times in 2009, Moody’s data show.

• Icahn is betting U.S. stocks will crash…

Icahn’s investment fund, Icahn Enterprises, had a “net short position” of 138% at the end of last quarter.

This means the fund had 138% more bearish bets than bullish bets. For example, if you own $100,000 worth of stocks and also short (bet against) $238,000 worth of stocks, you’re 138% net short.

Last week, Barron’s reported that “[m]uch of that position is in the equity market, including major indexes.”

• Doug Casey is betting U.S. stocks will fall, too…

Earlier this year, Doug made a HUGE bet on gold.

He invested about $1 million of his own money in gold stocks. These stocks, as Dispatch readers know, are leveraged to the price of gold. In other words, the price of gold doesn’t have to rise much for them to soar.

Consider the VanEck Vectors Gold Miners ETF (GDX), which tracks large gold stocks. It’s up 74% this year, or nearly four times the 21% jump in the price of gold.

• Now, to be clear, Doug didn’t buy GDX or any fund like it…

He bought tiny gold stocks with massive upside potential.

Most analysts have never even heard of these stocks. But Doug found them because he’s spent four decades developing a secret method of finding gold stocks with huge upside.

Doug’s approach, which we call “The Casey Method,” has handed him incredible gains on gold stocks. We’re talking returns of 487%, 711%, and even 4,329%.

You can learn more about The Casey Method by watching this new presentation. You’ll also learn how to access nine gold stocks that Doug and his team recently found using this same method. Each of these stocks could double in the coming months. Some could go even higher.

To learn about The Casey Method—and how to access the names of these nine stocks—click here.

Chart of the Day

The entire global stock market appears to have peaked.

Today’s chart shows the performance of the FTSE All-World Index, which tracks stocks from all around the world. You can see this key index set an all-time high last year. But, like the S&P 500, it didn’t hold its new high for long.

After rallying earlier this year, the FTSE All-World Index is “rolling over” again. This is a bad sign for investors around the world. It means stocks from Tokyo to London could be headed lower.

If you’re nervous about stocks, we encourage you to own physical gold. As we often say, it’s the ultimate safe-haven asset. Investors buy it when they’re nervous about stocks or the economy.

If stocks keep falling, investors across the world could take shelter in gold. And that could send the price of gold much higher. If you’re as wary of the broad stock market and the economy as we are, you might also want to own gold stocks. As we explained above, they’re the best way to profit from rising gold prices.

Regards,

Justin Spittler
Delray Beach, Florida
November 7, 2016

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