Checking Out the Wrong Way Charlies

Traders have an uncanny ability to shoot themselves in the foot at critical moments in the market. They love ’em at tops and, at bottoms they can’t get rid of them quick enough. Here’s what Market Vane reported for the percent of traders that were bullish at the last big turning points, as well as now:

Might this be another top? It would not do to bet alongside the majority of traders here. The rally from the lows of March ’09 (when everybody hated stocks) has been a corrective Wave 2. Second waves in bear markets are part of the topping process, sometimes¬†retracing almost all of the Wave 1 decline. That’s why it is so difficult to pick the top of a corrective wave. We have to go with the market internals to understand the outlook. Every step of the advance since the ’09 lows has displayed the characteristics of a correction as opposed to the start of a new bull market.

The bears, of course, have been constantly frustrated–blown out of their short positions time and again. But bulls have not done much better, even with a three year plus rally; the Institutional Index, a capitalization weighted index of the 75 most owned stocks by mutual funds and major institutions is down approximately 30% from the high reached in 1998. This is a very big top, and when it’s finally over it will have what is known as an “umbrella” top, with a huge arc drawn over the peaks.

The most recent phase of rally had the poorest breadth, lowest volume, and lightest tick readings I’ve seen in 45 years of watching these things. It is truly, in my opinion, another great opportunity to get out of stocks.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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