Tuesday, February 12, 2013
They say nobody rings a bell at the top of the market. But sometimes... Mom calls.
My mother is the epitome of the public investor – which makes her an outstanding contrary indicator.
She doesn't pay particularly close attention to the financial markets. Sure, she listens to the news, and she can tell you if stocks in general are trending higher or lower. But she's not exactly glued to CNBC all day, focused on every blip on the financial radar screen.
So when mom decides it's time to buy or sell stocks (or gold, or oil, or cattle futures), it's because the idea has gone "mainstream." Her hairdresser is talking about it. The ladies in her bridge club are discussing it. The topic has probably come up at her church choir practice.
And whatever she wants to do is usually a bad idea.
Mom called me up yesterday, looking to buy stocks. So it's probably a good time to start selling.
I introduced the "Mother Indicator" to Growth Stock Wire readers in 2006. The last time Mom was bullish on stocks was two years ago. And market conditions were eerily similar to what we have today...
Back then, investor sentiment was off-the-charts bullish. Newsletter writers were pounding their keyboards encouraging readers to buy stocks. Bullish percent indexes were in extreme overbought territory. Summation indexes were high and were just starting to roll over. More than 90% of stocks in the S&P 500 were trading above their 50-day moving averages.
Then... Mom called and wanted to buy stocks. The market fell 7% over the next five weeks.
Signals from the Mother Indicator don't occur often – once every year or two. But they're remarkably accurate. And they always seem to occur within days of important turning points.
For example, I first acted on the Mother Indicator back in 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.
Eight weeks later, the S&P 500 was down 8.5%.
We may not have seen the high point for this rally phase of the stock market just yet... But we're close. All sorts of technical indicators are waving the caution flags. And now, Mom is looking to buy stocks.
Now is the time to be careful. If history is any guide, it's about to get rough out there.
Best regards and good trading,
Jeff uses several technical indicators to gauge where the market's headed next... including Bollinger Bands, the MACD indicator, and bullish percent indexes.
And in October, he added one more to his list: the Empty Restaurant Indicator. "If you want to get a good indication of the health of the economy," he writes, "just look at your local restaurants." Read more here.
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