Why it May Be a Good Time to Take Profits

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 ClarkSource: Growth Stock Wire

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