Caution! The stock market is currently waving 5 major red flags.

It doesn’t have to be the end of the world to be cautious for investors. While many stocks are far from their all-time highs, many indices are doing quite well. In effect, they erase a large portion of the bear market losses in 2022. However, there are some stock market red flags and stock market risks to watch out for.

The S&P 500 is down 10.75% from its all-time high – but officially back in a bull market by some measures – and the Dow Jones Industrial Average is down just 8% from its highs. The Nasdaq And Russell 2000 are doing a little bit worse, but overall there’s no denying that they’ve moved up from the lows.

Identifying a few red flags in the stock market doesn’t mean you have to go completely bearish and short everything in sight. It means understanding stock market signals and paying attention to some warnings. It means protecting capital and thinking some defensive measures, such as reducing positions and/or potentially raising some cash in the event of a larger correction.

Let’s look at some stock market risks.

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Most of this year’s stock market gains have come from just a handful of stocks. In fact, almost 90% of the profits to date can be traced back to only seven stocks. While that data may be a bit out of date, there’s no question that mega-cap technology has run the ship.

meta (NASDAQ:META), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Nvidia (NASDAQ:NVDA) and a few others storm higher up. Meanwhile, many other stocks continue to struggle.

Admittedly, there is a sense of rotation going on, with selling pressure in tech and strength in small caps and a select few sectors. However, it’s too soon to know if that rotation has any meaningful power.

Like Callie Cox wrote, “By one measure — the S&P 500’s cumulative line of progression and decline — May’s balance from rising to falling stocks was the worst for a monthly gain in at least the past two decades. ”

Is this an outright sell signal? No. However, poor breadth leaves the market vulnerable to the performance of just a few stocks unless the money continues to circulate to other groups – and that increases the risk a bit.

Rising rates and a strong US dollar

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The connection between certain asset classes can be complicated, but these two are relatively simple. A strong US dollar is hurting multinationals’ profits, while higher interest rates are negative for companies and stocks.

Higher interest rates reduce lending and liquidity, which is a clear negative. But more than that, higher interest rates make other assets (such as bonds and CDs) more attractive relative to equities.

That said, bull markets can be accompanied by multiple headwinds, including higher rates and a higher dollar. A week ago, the US dollar and 10-year Treasury yields hit multi-month highs, with the latter more than 18% higher than their lows.

Stocks didn’t seem to mind. However, if that trend continues, it will likely take its toll.

Inverted yield curve, weakening economic data

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The 2-year/10-year Treasury yield curve is closely monitored as an indicator of an economic recession. It’s not perfect, but when inverted over longer periods of time — in other words, short inversions aren’t as accurate — it can help predict an economic contraction.

So far that has not been the case.

The 2-year/10-year yield curve bottomed out in early March, but is still clearly negative. Interestingly, it has been negative for almost a year now after the reversal in early July. It is also worth noting that the 3-month/10-year yield curve has inverted since October.

I wouldn’t say that alone means there will be a recession, but the continued reversal of it is remarkable.

While the labor market remains fairly robust, the recent PMI data from June 1 all missed expectations. Furthermore, these measurements were all below 50, indicating contraction. All ISM data so far this month has also beat expectations. Finally, the recent job claims data — which “measures the number of individuals who applied for unemployment insurance for the first time in the past week” – Bumps at multi-year highs.

To some extent, this is what the Federal Reserve wants: slower economic activity to take the heat out of inflation. However, the Fed has also been pushing rate hikes at a record pace, so it’s hard to say what the lagging effect might be.

As of the date of publication, Bret Kenwell held positions (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com’s publishing guidelines.