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It's Time for Traders to Sell

By Jeff Clark
Tuesday, November 15, 2011

All of a sudden, everyone is bullish again.
 
The American Association of Individual Investors (AAII) reported last week that 44.7% of the respondents to their survey were bullish on the stock market outlook for the next six months. That's the highest level of bulls since January. So it seems everyone is rushing over to the "year-end rally" camp.
 
I'm thrilled about that... Because I helped set up that camp in early October (see here and here). But I'm also a little scared. OK... a lot scared.
 
When it comes to the stock market, popular opinion is rarely correct. So it concerns me that this many folks have turned bullish after the S&P 500 has already rallied 18% off its lows in just the past six weeks.
 
I'm also concerned about the following chart...
 
 
This is a chart of the New York Stock Exchange Summation Index (NYSI). It's an intermediate-term measure of overbought and oversold conditions. The red arrows on the chart indicate times when the NYSI was overbought and when the MACD momentum indicator (the bottom box) extended beyond the 200 level... and then turned lower. (That's a bearish signal and often precedes a stock market correction.)
 
Stocks declined almost immediately following sell signals from the NYSE Summation Index.
 
 
As you can see above, the smallest decline was from May through August 2009, when the S&P lost 5%. The biggest decline was just after the January 2009 sell signal. Stocks fell almost 30% before bottoming in early March 2009.
 
As of last Friday, we didn't have a sell signal. But the MACD lines are curling over. And it will only take a little selling pressure to push it off the cliff.
 
Rather than joining the crowd and staying bullish on the market through the end of the year, it's much smarter to take some profits off the table here and get a bit more conservative. In fact, aggressive traders should be looking for some short-selling opportunities.
 
Best regards and good trading,
 
Jeff Clark




Further Reading:

One sector Jeff advises taking off the table is oil. "Even if you think stocks are headed higher through the end of the year, you're unlikely to profit from buying into the oil sector." See why he's bearish on oil here: Sell Oil Stocks Now.
 
Last week, Jeff spotted a bearish sign on silver's chart… a sign no one else noticed. Silver is in a dangerous spot, he says. "That makes me want to pay attention." Get the details here: A Deadly Sign for Silver.

In The Daily Crux
Market Notes
Oil sits at its highest level since July... up more than 25% since October.
 
Warren Buffett buys stake in tech giant IBM... shares are less than 1% off their all-time highs.
 
"Gadget boom" leaders Google and Qualcomm touch three-month highs.
 
Popular natural gas fund UNG plummets to a new all-time low... down 56% in two years.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1251.78 -1.0% +4.4%
Oil (USO) 37.86 -0.9% +3.8%
Gold (GLD) 173.20 -0.4% +29.6%
Silver (SLV) 33.33 -1.2% +30.6%
U.S. Dollar 77.48 +0.8% -0.9%
Euro 1.36 -0.9% -0.4%
Volatility (^VIX) 31.13 +3.6% +51.0%
Gold Stocks (^HUI) 593.14 -1.7% +7.5%
10-Year Yield 2.04 -1.0% -26.1%

World ETFs
Symbol Price
Change
52-Wk
USA (SPY) 125.46 -1.0% +6.5%
S. Korea (EWY) 54.57 -0.5% -0.8%
Canada (EWC) 27.58 -1.1% -4.5%
Taiwan (EWT) 12.81 -0.1% -6.7%
S. Africa (EZA) 63.10 -1.7% -7.4%
Japan (EWJ) 9.28 -0.4% -8.1%
Israel (ISL) 14.40 -0.4% -8.8%
Lat.America (ILF) 45.07 -1.3% -11.8%
Singapore (EWS) 11.87 -0.2% -11.8%
China (FXI) 37.31 -1.3% -17.3%
Russia (TRF) 15.93 -2.2% -21.3%
India (IFN) 23.52 -1.5% -29.8%

Sector ETFs
Symbol Price
Change
52-Wk
Retail (PMR) 21.39 -1.4% +17.1%
Utilities (XLU) 34.94 -1.2% +16.3%
Big Pharma (PPH) 69.35 -0.7% +12.9%
Internet (HHH) 78.57 -0.3% +12.1%
Consumer Svcs (IYC) 71.14 -0.6% +10.4%
Big Tech (QQQQ) 57.49 -0.6% +10.3%
Health Care (IYH) 69.30 -0.6% +10.0%
Industrials (IYJ) 63.26 -0.9% +6.3%
Real Estate (IYR) 55.22 -2.0% +4.5%
Defense (PPA) 18.14 -0.8% +3.8%
Software (PSJ) 24.93 -0.1% +3.6%
Transportation (IYT) 88.48 -0.5% +3.3%
Oil Service (OIH) 129.18 -1.3% +3.0%
Media (PBS) 13.01 -0.9% -0.7%
Semis (PSI) 14.49 -1.4% -2.3%
Basic Mat (IYM) 67.87 -0.9% -2.5%
Telecom (IYZ) 21.07 -1.2% -2.5%
Construction (PKB) 11.44 -1.7% -2.7%
Insurance (PIC) 15.11 -0.1% -3.2%
Water (PHO) 16.95 -1.2% -3.8%
Biotech (PBE) 19.32 -0.2% -3.8%
Financials (IYF) 48.58 -1.8% -9.1%
Nanotech (PXN) 6.33 -0.5% -35.2%
Alt. Energy (PBW) 5.70 -1.6% -42.5%

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