Tuesday, February 8, 2011
Everything is in place now.
For the past couple months, I've been harping about the potential for a bearish move in the market. Sentiment indicators, summation indexes, bullish percent indexes… all the technical indicators are warning of a swift and severe correction. The market doesn't care. It just keeps marching higher.
The high-frequency trading desks, the algorithmic computer programs, and the Bernanke printing press have overpowered the technical indicators and – like Atlas propping the world up on his shoulders – kept a persistent bullish bid beneath the market. The new high list keeps growing. Expensive stocks keep getting more expensive.
Every day I warn investors of the potential risks in the market. And every day I start the morning by washing the egg off my face. Why worry about risks when there are such large gains to be made? "It's a new world," the market says. "Either get on board or get out of my way."
So yesterday I sat at my desk, banging my forehead on my keyboard and wondering what else has to happen before the market corrects. What other indicator has to reach a ridiculously extreme level and warn of the impending doom before stocks finally take a breather? This was 9:41 in the morning, Pacific Standard Time (PST).
At 9:42, the phone rang and the final piece of the puzzle fell into place.
"Hi Jeff," the voice said, "It's your mom. Just wanted to get your opinion on the stock market. We're sitting in cash right now, earning 0%. And we're thinking about buying some stocks."
Get out of the market while you can, folks. The "Mother Indicator" has just issued a sell signal.
Mom is the perfect example of a public investor. She doesn't pay much attention to the financial markets. So if she's aware of a trend, or has an inkling to put money somewhere, you can bet the idea has gone mainstream. And she has a near-perfect track record as a contrary indicator.
Signals from the Mother Indicator don't occur often – perhaps just once every two or three years. They are, however, remarkably accurate… And they always seem to occur within days of important turning points. For example, I first acted on this signal in early February 1994. Stocks had been on a terrific run – up 20% in about eight months. The Fed was easing, so interest rates on CDs and money market funds had been falling. Mom was looking to get a bit more bang for her buck. And for the first time since August 1987, she wanted to buy stocks.
I got the call on the first Saturday in February, and sold everything the next Monday morning. That was the exact high for the stock market in 1994. The S&P 500 lost 17% over the next two months.
Mom has been useful in calling tops and bottoms in the gold and oil markets, as well. In fact, some of the best trades I've recommended to subscribers of my various newsletters over the years have been based on using Mom as a contrary indicator. I've written about the Mother Indicator before. I've given speeches on the topic. It's one of the most reliable market timing indicators in my arsenal.
At 9:42 PST yesterday morning, the Mother Indicator flashed a sell signal. The S&P 500 was just above 1,322 at the time. I'll bet it's significantly lower two months from now.
Best regards and good trading,
Investors Intelligence survey, Barron's, the Wall Street Journal… none of these sources are "anywhere near as accurate as my mother," Jeff said back in 2006. "Accurate, that is, in a contrary sort of way." See his original analysis of the Mother Indicator here: The Mother of All Indicators.
"Go ahead and play in the stock market if you must," Jeff wrote last week. "It has defied gravity and a host of technical indicators that have kept me cautious." But if this sector rises, it could be 1987 and 1999 all over again. Find out what to watch for here: We're Inching Closer to the Breaking Point.