WATCH: The 4 Stage Stock Market Cycle


Technical Tuesday: WATCH OUT! It's Time to Sober Up

By Chris Rowe December 10, 2013 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

Markets are up 27% this year -- gains that we haven't seen in a decade.  Statistically, it is close to a certainty that a year like this will be followed by another up year.

But there's one sneaky little bug that has made its way into your bullish profit machine that infects investors' accounts with a debilitating disease.

It's time to sober up again, and it's best to do so when prices are high -- BEFORE they correct. 

The last time this bug crept into the Fed's profit machine was in May of this year, IMMEDIATELY BEFORE the tapering fears actually caused prices to drop.

The single most dangerous "debilitating disease" found in the financial markets is called "hype"!   

And in speaking to my readers (and even personally), I have seen many scenarios where lots of profits that were once sitting on the table had been cut in half or even disappeared!  I don't want this to happen to you, so take a look at the chart below...

The last time we saw this stock market bug appear in the system, the S&P 500 corrected by 4.5% and the Russell 2000 corrected by 7%.  This may not seem like a big deal, especially because you know the market eventually turned around and pushed higher.  But it was a nerve wracking time for those who wondered if the Fed manipulation was over. 

Should I have sold?

Should I sell now?

I wish I had at least hedged!

These were the thoughts going through investors' minds until the S&P 500 finally made it back to that May 21 top (only to decline again and recover by mid September). 

Let me reveal what this "infectious bug" looks like.  If you're a Chris Rowe fan, then you've probably seen it before.  It's the Investors Intelligence Advisor Sentiment Data.  I usually show it to you in chart form (which you can see below).  But you should look at this first:

The percentage of bullish advisors is above the "red flag" level of 55%, showing excessive bullishness.  But even more surprisingly, the percentage of bearish advisors is at a 25 year low of 14.3%!!!

Feel free to match the numbers from previous dates to the chart of the S&P 500, above. 

Let me take a step back before I show you a 10 year historic chart of this data compared to the stock market and its tops...

The Investors Intellgince Advisor Sentiment Index is a contrary indicator that has an amazing history of calling market tops and bottoms.

They poll over 100 advisors and newsletter writers and check the % of those bullish, bearish, or looking for a correction.

When we are at or near a market top, advisors are excessively bullish.  We hardly ever see readings of bullishness over 60% (black lines), and we seldom see readings over 55%.  Behold!

Now look at the chart below.  The two charts show the same data a little differently.  The top half of both charts is the S&P 500 (10-year history).

Red line is the bulls, blue line is the bears.  The other chart is just a black line that represents the % DIFFERENCE between bulls and bears.  Compare the history.

Can the market charge higher?  Yeah.  Does that mean we should fear missing the advance and be very bullish in this market?  No.

Reduce your bullish exposure or hedge your bullish positions with covered calls or some bearish positions on weak sectors.  You will almost certainly be able to buy stocks back or close out hedges with the market at lower prices.

Instead of being the person who is wondering -- AFTER A SELLOFF -- if you should sell, you'll be the one who is happy to buy again at lower prices!