Has the Stock Market Topped or Can the Bull Run Longer?

It’s been a while since investors have seen what a bear market looks like. Bull markets by rule last much longer than bear markets – 97 months versus 18 months if we look at data taken since the 1930s. The last bear market isn’t likely to be forgotten anytime soon; the subprime mortgage meltdown took down half of the market’s value and lasted about 16 months. By most economists’ standards, that ended in March of 2009, putting us on month 85 of the current bull market.

So the bull market, based purely on an average timeline, still has a year to go. The question is whether the bull market still looks healthy or is showing the tell-tale signs of retreat. Last year didn’t do much to bolster bullish investor spirits with a flat performance, while this year’s market started off in a free fall only to recover back to its original starting point.

U.S. stocks flirted with all-time highs this year with sectors like health care offsetting losses in losing segments of the economy. At the same time, investors searched for any reason to keep the rally going. But sector performances are telling, with auto manufacturers like Ford (F) and General Motors (GM) reporting disappointing vehicle sales numbers last Friday, causing their stocks to drop more than 1.2%.

On Monday, seven out of 10 industries fell, led by consumer discretionary and industrial stocks, while health care companies gained roughly 1% and energy companies enjoyed a boost thanks to the volatility in oil prices.

Looking at sector performances over the past year helps us see where we’re at on the business cycle – a gauge for which stage of the economy we’re in. The top three winners have been telecommunications, consumer staples and utilities, while the top three losers are energy, materials and financials.

Interestingly, these performances fall in line with what you might expect to see during a recessionary phase of the economy, with defensive sectors leading the market. It’s a strong sign that the market is already preparing for an economic contraction.

The Fed is adding confusion to the market as well with its flip-flopping stances on the economy and conflicting statements regarding interest rates. Fed Chairwoman Janet Yellen assured markets last week that the pace of future interest rate hikes will be gradual with traders pricing in the earliest possibility of a rate hike in December. It seems very likely that even that will be pushed back to 2017, suggesting that the economy is weaker than expected at this point.

One key statistic that indicates the top of a bull market is the margin debt level in the market. Historically, steady increases in margin debt eventually hits an uncontrollable level with too much money being leveraged and not enough new money entering the market. When this happens, a collapse usually follows right behind.

Right now, margin debt levels are hovering near all-time highs but don’t appear to be growing any higher. Securities market credit hit the mid- to high-$400 billions in 2014, but then seemed to stabilize around that level with a high of $507 billion in April of last year. According to the latest data, margin debt levels as of February have fallen to $435 billion.

There’s some mixed data regarding the direction of the economy but most evidence seems to indicate that the bull is on its last legs. Whether or not the correction will be a violent reversal or a steady contraction is now the biggest question for investors.