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Signs of a Top?

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    June 12, 2013

    Let’s see now. The S&P 500 is within 1.5% of its peak of May 22, and just found support at its 50-day moving average to have held again, bouncing off it sharply on Friday in reaction to the monthly jobs report.


    What’s not to like about the situation?

    Not a thing according to investor sentiment, which is very bullish and confident. As noted on Saturday, the poll of its members by the American Association of Individual Investors shows the highest allocation of assets to the stock market since September, 2007.

    Investors are so confident that margin debt, buying stocks with 50% down payments, is at a record level.

    According to the latest consumer confidence reports, American consumers are more confident than they’ve been since before the 2007-2009 recession.

    The Investment Company Institute reported recently that young investors, those who began investing in the last ten years, in some pretty scary times for the stock market, were less willing to take financial risks until last year. But last year 62% of investors in their 20’s had 80% or more of their 401K holdings in equities, compared to only 48% invested as aggressively in 2007.

    So what’s to worry about? How can the market go anywhere but up with so much bullishness and confidence to support it?

    And what’s with the heavy insider selling? What are they worried about?

    Well, there is the fact that those levels of confidence not seen since 2007, are warnings in and of themselves, since extremes of investor bullishness, consumer confidence, margin debt, and so on, are always present near market tops.

    Then there is the fact that looking at the long-term picture of the S&P 500, there are two situations. The S&P is overbought above its long-term 200-day moving average to a degree that in the past almost always resulted in a pullback to at least retest the support at the m.a., which would be a decline to about 1,500. 


    And it is also back to and fractionally above its serious peaks of 2000 and 2007. That is okay if the secular bear market that began in 2000 has ended.

    But if the secular bear market has not ended, the current situation of the S&P 500 looks ominously similar to the pattern of the last secular bear market of 1965-1982, when the Dow returned to its previous two peaks in 1973, and broke out to a fractional new high in 1973, which had investors excited, bullish, and convinced that secular bear was over. But the next cyclical bear market was even worse than the previous two.


    Could Washington finally moving to reverse its massive fiscal stimulus of five years of unprecedented government debt spending and tax cuts, and the Federal Reserve beginning to reverse its equally unprecedented monetary policy of QE stimulus and record low interest rates, wind up being the catalysts for a next bear market?

    Then there is the continuing collapse of global markets outside the U.S. Are they seeing serious negatives in global economic conditions that U.S. markets are either ignoring, or believe won’t affect the U.S.?



    To read my weekend newspaper column click here:  Which Way For Gold From Here?

    Subscribers to Street Smart Report: There will be an in-depth ‘U.S. Market Signals and Recommendations Update’ tomorrow in your secure area of the Street Smart Report website.

    Images: Flickr (licence attribution)

    About The Author


    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

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