Are the Markets Staring at a Massive Plunge?

Is the Dow Jones Industrial Average past its peak after a record run?

After a steep climb to the top of the hill, major U.S. stock indexes, including the Dow Jones Industrial Average (NYSEARCA:DIA) and the S&P 500 (NYSEARCA:SPY), have recently reached record highs. Will the climb continue or is the stock market at the top of the roller coaster and about to take a historic plunge?

More and more signs point to a plunge for the Dow Jones Industrial Average and major indexes rather than a continued climb. Here’s why:

1. Excessively bullish sentiment: The Investment Company Institute reports that inflows to mutual funds from retail investors are running at high levels, with $1.05 billion coming in the week ending February 27 and a whopping $5.02 billion during the week of March 20 as mom and pop investors scramble to buy stocks after missing most of the recent rally.

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The Investment Company Institute also reports that the total assets of all stock-based mutual funds climbed from $5.93 trillion in December of 2012 to $6.29 trillion in February of 2013 — and that was before the record-setting highs.

2. Deteriorating economic fundamentals: The impact of the budget sequester is now being illustrated by the recent jump in unemployment claims, as well as the disappointing payrolls reports from ADP and — most recently — the closely-watched non-farm payrolls report from the U.S. Bureau of Labor Statistics on April 5, which was an unmitigated disaster.

The Institute for Supply Management’s March 2013 reading declined 2.9 percent from February’s 54.2 for a reading of 51.3 during March. The ISM also reported that its March Non-Manufacturing Index fell as well, missing expectations, to join previous disappointments in recent PMI reports…