Tuesday, August 28, 2012

Take Profits Now

I reiterate my advice to reduce stock holdings at current levels.

There seems to be a building consensus that government authorities in the U.S. and Europe will soon engage in concerted actions to add further stimulus to markets and economies.  In addition, even though Chinese economic activity is slowing markedly amid a glut of various products, the Chinese authorities are also expected tow provide stimulus.  And yet....

I have found that market sentiment measures are highly reliable for short- to intermediate-term readings on the stock market.  That's not so for technical measures, though I do refer to several.  And while valuation is incontrovertibly the most important determinant of long-term returns from the stock market, it is useless in the short term.

Several of my favorite measures of market sentiment are now flashing strong warning signals.  The put/call ratio, for example, has been particularly reliable over the past year.  It showed a relatively high degree of pessimism at the beginning of June, for example.  Now after many stocks have risen 15-20% in price over the past two months, the put/call ratio is showing the highest degree of optimism in about a year.  Similarly, the Consensus, Inc. and MarketVane surveys of institutional investor sentiment are at high (bullish) levels.

When these conditions have existed in the past, they usually have been followed by declines in stock prices.  I know that any significant news about Europe, China, U.S. politics, or geopolitics in the Middle East could seem to be a catalyst for a large move in stock prices (either up or down).  I think, however, that they will be explanations for what the market seems likely to do anyway.  And that, in my opinion, is to go down.

Steve Lehman

 S & P 500:  1408

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