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Stocks are flashing a bigger warning sign than they did for Brexit and the US election

Joe Ciolli
red light

(Red alert.Flickr/Joe Lewis)
Alarm bells for the US stock market are getting louder.

Almost 8% of the companies in the S&P 500 are trading at 52-week lows, the most since February 2016, according to data compiled by Bank of America Merrill Lynch.

That's a bigger portion of the index than was seen during the US election in early November, or the period surrounding the UK's decision to leave the European Union, which saw the S&P 500 plunge more than 5% in just two days.

BAML is interpreting this as a warning sign for stocks. And while that doesn't necessarily mean the firm thinks a sell-off is imminent, it's another crack in the market's foundation that investors would be wise to watch.

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BAML's statistic is just one way of looking at the cracks forming under the surface of a market that appears unassailable at first glance, sitting 1.3% from a record high. Other warning signs are flashing, including the benchmark's reliance on heavily weighted companies responsible for a big portion of share gains.

Federal Reserve Board Chair Janet Yellen has also been saying the Fed sees stock valuations as "elevated." The Fed's rhetoric around stock prices became more pointed at its July meeting, indicating it has become a worry for the central bank. The S&P 500 has risen 9.4% this year.

The combined effect of these factors has investment managers at LPL Financial thinking about positioning themselves a little more defensively, at least for the time being — although the firm remains constructive further into the future.

"The risks have begun to stack up," Burt White, the chief investment officer at LPL Financial, wrote in a client note. "We think it is a good time to consider taking a little risk off the table. But the longer-term outlook still looks good. We see no recession on the horizon, the economy is showing no signs of excesses that have historically led to the ends of business cycles, and corporate America appears to be in excellent shape."

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