Four bear market warning signs to watch out for

The US housing market is increasingly fragile. The rebound in the UK seems to be over. Stock markets are in turmoil. Is this a passing correction - or will things get worse? There are four key warning signs that may point the way forward...

The global economy continues to rely upon American consumers borrowing to buy goods they don't need that are mostly manufactured in China. It is now well understood that their willingness to do this and live beyond their means has only been possible because of rising house prices. So again we update that story.

Federal Reserve chief Ben Bernanke urges banks to take more care on home loans. At the same time he expresses confidence that the US housing market is cooling in an orderly and moderate fashion (he hopes).

Late payment on mortgages rises 29%.

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Lowe's, the US home improvement retailer, cuts its sales forecast for the year.

The National Association of Realtors report that sales of existing or previously owned houses fell 2% in April.

Buyer's market; a record glut of houses for sale than at any time in history should send prices tumbling', reports The Boston Globe.

David Lereah of the National Association of Realtors said that 40% of all 2005 home sales were second homes. 10 years ago that number was only 9% - 10%.

29% of 2005 housebuyers have no equity.

The housing market in the UK has, over recent months, been buoyant. But that might be changing. Nationwide building society reported that annualised house price inflation in May was lower at 4.7%, compared to 5.3% in March.

Meanwhile, the Bank of England reported that in April mortgage approvals were at their lowest since September.

And - horror of horrors - the number of households that believe it is a good time to save is at its highest level since 1998. A swing from borrowing and spending to saving and paying down debt may be underway and represents a real threat to the UK economy.

The coming weeks are going to be of paramount importance. The technical signals listed below are potentially very significant and are the key levels to watch.

a) FTSE 100 5,500. Below that level selling should escalate.

b) The Dow Jones Industrial Average 11,000. That number now represents a key signal for future weakness of the US stock market.

c) The Philadelphia Housing Index 225. A measure of US house builders. Weakness below 225 would confirm very serious problems for the US housing market.

d) The VIX (the US stock market volatility index) 25.6. Strength above, coupled with all of the above being violated, would be the clincher.

By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.

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