Red Alert

Yesterday I walked through the living room while my wife was watching Oprah, and there was an “expert” on there saying that the market had nowhere to go but up. The viewers were advised to run out and buy stocks. I think the Oprah show may have become the prime contrarian indicator for the 21st century, replacing the cover of Time magazine.

I am enjoying this rally as much as anyone, but it is important to recognize that all the conditions for a major market top are in place and a severe selloff could start at any time.

The yield curve shows that the bond market has been forecasting a recession for months, and recent steepening of the curve suggests that the recession could become severe and prolonged.

But the stock market is rallying as if we were embarking on an economic boom.

When the stock market is having an argument with the bond market about the future, the bond market almost always wins.

The percentage of stocks rallying is very high. More than 400 of the S&P 500 stocks are trading above their 50 day moving averages.

Likewise, the NYSE Bullish Percent Index is over 70. This index level is associated with market tops. All market sectors except health care and information technology appear severely overbought.

Smugness and bullish sentiment are very high. The VIX has reached a level only seen at market tops.

The difference between new highs and new lows on the NYSE is in an area associated with short-term tops. There were only two new lows on the NYSE yesterday.

But today’s buyers will become tomorrow’s sellers when the tide turns. I think this is a good time to stick with low-volatility stocks paying good dividends and maintain a large cash reserve.

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5 Responses to “Red Alert”

  1. Uncle Jack Says:

    That Oprah Show comment is hilarious. I agree with you.

  2. Joe Friday Says:

    Stop watching Oprah. You will go blind!

  3. splangile Says:

    Please track that Oprah sentiment for us. Maybe it will be a good indicator in the future.

    PS I found your blog via Charles Kirk http://www.thekirkreport.com/

  4. Alligator Investor Says:

    Thanks for your comments. I eschew television in general and the Oprah show in particular, but my wife does indulge in self-abuse with the remote, so I suppose I am subjected to the risk of blindness via environmental pollution 😉

  5. ben hollander Says:

    “Yesterday I walked through the living room while my wife was watching Oprah”
    Humm I put that phrase through the Fibanator and it came back highly suspect. Indeed we all feel you were sitting right next to your wife watching Ophra just as I have been attached to mine watching Judge Judy & America’s Top Model!
    Who ever said working from home was easy!

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