What would you do if you expected a stock market decline, but had to be invested in stocks no matter what (i.e. if you are a fund manager of a mutual fund – you can’t have more than 5% in cash)? You would shift your portfolio out of cyclical (sensitive to economic cycles, i.e. makers of durable consumer goods, equipment) and into defensive stocks (pharmaceuticals, utilities). Such expectations would show up as underperformance of cyclical stocks compared to the general market (see chart). It is currently not the case:

Morgan Stanley Cyclicals Index (CYC) relative to S&P 500 Index. Source: StockCharts.com

Does that mean a downturn is not imminent? Looking back at the crash of 2008 you can observe the same “ignorance” as today: cyclical stocks started underperforming only after Lehman went bankrupt on September 15th. Earlier warning signs (dramatic decline in US Consumer Confidence, inversion of US yield curve) were completely ignored.

Long story short: beware of warning signs even – or especially – if the market ignores them.