The first major warning sign is that markets start making a series of lower highs and lower lows. Almost often during this process previous highs become resistance and previous lows keep getting breached with regularity. This is a sign that sellers have taken over. Sellers emerge each time the market rallies and sell into strength resulting in significant and sustained downside for the market.
The second indicator is that big gains in the market will be reversed very quickly. Have a look at recent data in the Indian Market from the National Stock Exchange of India on India's bench mark Nifty Index:
May 5, 2015 – Nifty close up 150 points
May 6, 2015 – Nifty closes down 7 points
May 7, 2015 – Nifty close down 228 points
Thus all the gains were lost within a few days. In other words there is no support for the market at higher levels and sellers who are in control of the market prevent the market from making any headway.
The third indicator is that Foreign Institutional (FII) money flows start to dwindle. Have a look at the recent FII data on the Indian stock market from moneycontrol.com:
Date Net Purchase / Sales
As you can see there has been sustained FII selling. FII's in India for example control over 40 percent of the stock market inflows. If the selling trend continues over the upcoming months we could easily enter a bear market.
The fourth indicator is that outflows of money cause the local currency to weaken considerably. Weak local currencies tie down the hands of policy makers like the local central banks who will have to raise interest rates to support the weak currency. This would be detrimental for the economy at large as high interest rates put a clamp on spending that is required to stimulate the economy.
The fifth major indicator is rampant overvaluation in the stock market. Earnings and dividend yield analysis can be used to see if the total yield from earnings and dividends is greater than the risk free rate of return. If the risk free rate is considerably higher than the total yield it will cause investors to reallocate assets from risky asset classes like stocks to risk free assets like government bonds and a substantial sell off may be looming.
The above indicators are well worth monitoring and can serve as early reminders of a bear market that is fast approaching.