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The last time the market did this, serious problems ensued

The last time the market did this, serious problems ensued

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The last time the market did this, serious problems ensued

The last time the market did this, serious problems ensued
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Here's a fascinating explanation for why stocks are going higher

Here's a fascinating explanation for why stocks are going higher Up next

Here's a fascinating explanation for why stocks are going higher

It’s not just the stock market that’s hot.

According to data from Thomson Reuters, the mergers and acquisitions market saw nearly $1.77 trillion in deals announced for the first half of this year. And, the second quarter of 2014 saw over $1 trillion in deals announced, the highest since the second quarter of 2007.

And, we all know what happened after that. But, does that mean we’ll see a repeat of seven years ago?

“If you look back in history, big merger waves definitely precede precipitous drops in the equity market,” said Gina Sanchez, founder of Chantico Global.  “As you have extraordinary valuations in your own stock, you can use it to buy up all sorts of things. So, there’s a reason these tend to happen at the top.”

(Watch: US stocks close at records; Dow near 17,000)

But trying to use M&A as a signal comes with its own peril, warns Sanchez, a CNBC contributor. “The problem with M&A as a timing tool is it’s not particularly precise,” she said. “It could go on for a while before it actually proceeds that drop. So, it’s not terribly exact. But what we do know is, when we see enormous waves of M&A, you can expect a precipitous decline to come after that.”

Mark Newton, chief technical analyst at Greywolf Execution Partners, also believes large M&A activity signals a possible top in the market.

“When you get a market that’s really as overbought as this,” said Newton, “it’s just one of a few signs to look out for.”

(Watch: Next stop for Dow is 17,024, Art Cashin says)

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Though the Dow Jones Industrial Average is near 17,000, Newton says there are signals technical traders should be on the lookout for. “You really want to see moved down to at least two or three month lows to really have some expectation the market’s going to have a precipitous decline,” he said.

The rally in the Dow is starting to get old, according to Newton, and the time to end could be soon. “We’ve been in almost 280 weeks now of rallying, the third-longest on record without a 10 percent correction [and] I believe the fifth-longest without a 10 percent correction,” he said. “It’s been over 1,000 days thus far. The market certainly is starting to show a few signs of being long in the tooth.”

To see the full discussion on the Dow Jones Industrial Average, with Sanchez on the fundamentals and Newton on the technicals, watch the above video.

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