Stock prices keep going up. But momentum is waning. MACD crossed down on the daily chart a couple of weeks ago. RSI and Stochastics also refuse to confirm the higher prices (not to mention volume). In addition, we are trading under a DeMark 13 sell signal on the weekly chart and a 9-13-9 on the daily. All of this suggests this rally is getting very long in the tooth:
So many pundits have been calling for a correction but “all the people can’t be right” so the market has just kept going up. Felix Zulauf, one of the few pundits I do pay attention to, said today that if stocks don’t correct soon we could see a 1987-style crash later in the year: “It’s a top building process that we are in… I’m just saying we are in dangerous territory, and people should be aware of that and take precautionary steps.”
Sentiment is bullish but, as I’ve said before, it doesn’t help us much in looking for tops. It’s much more valuable in looking for bottoms. Fear is a more powerful motivator than greed or euphoria ever will be.
Stocks are overvalued. Below is a chart that plots Warren Buffett’s favorite valuation metric, total stock market value relative to gross national product (via Pragmatic Capitalism). Looking at this it’s hard to argue stocks are cheap right now. Relative to bonds, yes, they are very cheap but as the pros like to say, ‘you can’t eat relative returns.’ Absolute returns are all that really matter.
The bottom line is the stock market is running on fumes, fumes that reek of the euphoria born out of a 15% runup in 3 months time. I’ve hesitated to turn bearish until now mainly because I felt there were just too many bears calling for a top/correction. But now there are just too many signs telling me to take money off the table. The risk/reward equation is skewed too far to the risk side so I’m going to start doing just that: reducing exposure to stocks.