The best analogy I’ve heard for bubbles and why they ultimately burst is the example of dropping grains of sand that build a mound. It gets steeper and steeper until one grain of sand causes an avalanche.

You can clearly see when the mound is getting steep, but no one knows when the final grain will set it all into motion. I’m seeing growing signs from several angles that an avalanche is about to occur.

Adam is heavily monitoring small-cap stocks as they continue to underperform the large caps as investors get more selective toward large caps at almost every major top — especially bubbles.

Take a look at Alibaba — the greatest IPO in history that buried Facebook’s performance of a few years ago. That event can be compared to the cities with accelerated growth constructing the tallest buildings in the world just as real estate and major economic tops occur…

The examples are many: the Empire State Building in 1930, the World Trade Towers in 1972, the Petronas Towers in Kuala Lumpur in 1997 before the Southeast Asia crash, and now, the Freedom Tower in New York. The Shanghai Tower was just completed and of course, there’s the Burj Khalifa in Dubai.

Dow Jones Reflected in the Markets

Margin debt and speculation are at record highs, greater than in early 2000 or late 2007 when the last two bubbles peaked. The Dow Megaphone pattern with higher highs and lower lows is reaching its likely final E-wave peak around 17,300 as I’ve been forecasting for the past two years. Markets can continue to edge up, but with likely very little gains unless they break decisively above this upper trend line. This very ominous pattern makes me think that it’s not likely.

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The Dow went up 33% from late 2012 into the end of 2013, in just 13.5 months. But this year, the Dow is only up 4.2% in nine months. This is another warning and vindication of the megaphone pattern thus far.

I wrote an article last week about massive denial from economists and analysts alike; who come on one after another and declare this isn’t a bubble because… stocks aren’t that overvalued compared to past major peaks.

Okay, here’s my question — what major peaks? We’re at levels that compare with most major peaks in history in price-to-earnings ratios (P/E). Robert Shiller has the better indicator and it takes the cyclicality out of the earnings and shows that we’re above peaks dating back to 1902 and all the way up to 1987. We’re closest to 2007’s peak. Only the extreme bubbles with the best demographic and geopolitical cycles in 1929 and early 2000 are higher.

But you can’t compare today with the massive geopolitical risks and rapidly declining demographic trends with 1929 or 2000 when such trends were the most positive!

Buying power has been sluggish as occurs in major tops as measured by Lowry’s and selling pressure is starting to rise, but there’s a huge factor missing so far… an accelerated rise in selling pressure.

I think that is due to investors coming to the ominous conclusion that the Fed just won’t allow the economy or markets to go down much. In other words, have no fear.

That’s definitely not a good sign!

No fear is another major sign of overvaluation, but then when the first sign appears of something going wrong, it creates a major shock and reality reset. Our demographic and geopolitical indicators strongly suggest things are going to go wrong ahead — as do our boom/bust sunspot cycles turning down in 2014 for the first time since early 2000.

Add to this scenario that economists and analysts continue to cite the rises in earnings, GDP and jobs growth as the reasons that the economy is doing fine and there won’t be a recession or downturn ahead. I’m listening to Jeremy Siegel as I write this and his view is that stocks are not overvalued and will continue to go up for years as there is no recession in sight. I would ask if a recession was insight when stocks topped in early October 2007?

I love academics and Siegel is loveable… but don’t listen to him.

Good trends always occur into major tops. How did Japan look in late 1989? How did the U.S. look in late 1929 or early 2000 or even in late 2007, for that matter? The good trends don’t necessarily mean a downturn or crash is imminent… but looking back at history, they’re clearly not a reason to say that a downturn can’t happen.

You’ll rarely see major tops by looking at short-term economic indicators.

Normally the smart money is the first sign that a major top is happening as they sell into tops and buy into bottoms. There are initial signs of that with buying power waning and small caps underperforming, but not as clear as in past tops.

More affluent households who are larger investors have the same affliction as the smart money — no fear due to faith in the Fed and artificially rising markets that have made them richer than ever.

I think that most Homer Simpsons may be better off than the smart money here — as they don’t see a real recovery in the first place.

That’s why selling pressure is not as high as it could be here in the final stages of this great bubble. This could be the secret indicator that does not flash as clear or bright a sell signal. Even the smart money tends to miss it at first. We’ll see.

So, we advise you to sell stocks on every rally in the weeks and months ahead in your 401(k) and passive investment models. For those following Adam O’Dell’s active strategies in Boom & Bust and Cycle 9 Alert, stick to his game plan. He’ll make tactical adjustments as they become necessary and he is increasingly on alert.

We don’t know when that final grain of sand will drop — but it’ll create an avalanche when it does drop. Bubbles don’t correct, they crash!

We continue to advise that it’s better to get out a bit early than too late. I still see very little upside from here and a huge downside of a possible 65% drop on this Megaphone Pattern.

Be warned and have the courage to act decisively… protect your assets!

Harry

Follow me on Twitter @harrydentjr

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Harry Dent
Harry S. Dent Jr. studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of his chosen profession that he turned his back on it. Instead, he threw himself into the burgeoning new science of finance where identifying and studying demographic, technological, consumer and many, many other trends empowered him to forecast economic changes. Since then, he’s spoken to executives, financial advisors and investors around the world. He’s appeared on “Good Morning America,” PBS, CNBC and CNN/Fox News. He’s been featured in Barron’s, Investor’s Business Daily, Entrepreneur, Fortune, Success, U.S. News and World Report, Business Week, The Wall Street Journal, American Demographics and Omni. He is a regular guest on Fox Business’s “America’s Nightly Scorecard.” In his latest book, Zero Hour: Turn the Greatest Political and Financial Upheaval in Modern History to Your Advantage, Harry Dent reveals why the greatest social, economic, and political upheaval since the American Revolution is on our doorstep. Discover how its combined effects could cause stocks to crash as much as 80% beginning just weeks from now…crippling your wealth now and for the rest of your life. Harry arms you with the tools you need to financially prepare and survive as the world we know is turned upside down! Today, he uses the research he developed from years of hands-on business experience to offer readers a positive, easy-to-understand view of the economic future by heading up Dent Research, in his flagship newsletter, Boom & Bust.