Special Study 2010
Topping Markets
January 18, 2010
We believe that the stock market is in a topping phase, and is likely to head lower. This is a time for caution and adjustment of equity levels and holdings.
As you may recall our December 2008 study, Rally at Hand, explained that the stock market can move in a direction opposite to the economy for a time. We concluded: “We look for a very strong intermediate term rally, not the end of the bear market, but a rare chance to profit from bear market volatility. For underinvested accounts, it is time to buy stocks.” Stocks staged a phenomenal rally. The upswing has been led by lower quality stocks, those most beaten down in the prior bear phase.
Recent data now makes us believe that it is prudent to take some profits and reduce equity exposure. Part of our caution comes from excessive optimism. A few weeks ago, investment advisor surveys showed 35 percent more bulls than bears; an extraordinary level. A number of large financial institutions suggest adding equities, right on top of a 210 day market advance. Last week more than 800 stocks set new highs against only 3 new lows, not uncommon near market tops. Wall Street now averages 7.4 “buy” recommendations for every “sell”; an indication of speculation. This is especially true in light of the recent actions of corporate insiders, who are heavy sellers. The VIX “fear index” touched 16.9 last week, a sign of excessive complacency.
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