Cautious Flags

It reminds me of the 1985 Plaza Accord, where James Baker committed the US to a depreciating dollar, bulldozing over the creditors and ultimately precipitating the 1987 Crash. The difference – back then the US was in position to lead the devaluation. Today, it is not. The creditors are going to bulldoze over it. The G-7 leaders meeting last weekend in Instabul, are all worried about currencies. Market fears of possible intervention to support the USD proved unfounded. For now, currencies represent one of the more troubling drags on economies.

So far, this rally has been confirmed by numerous advancing stocks with an expanding number of new highs compared to shares that are lagging. Since early August, over 90% of S&P 500 stocks have been trading above their 50-day moving averages. That is over-bough and keeps a share eye for a reversal. Watch out for market breath turning bad.

Surveys show that bullish sentiment at nearly 50%, while the number of bears in hibernation has fallen to just over 24%. That is a 2:1 ratio of bulls over bears, which is considered a negative sentiment signal from a contrarian perspective. That is because if the majority of investors are bullish, then who is left to buy? In fact, insiders at American companies are selling stocks – cashing in on the market’s big rally this summer.

Since the rally began, two market segments in particular have really taken off and have led the broad market higher – China and technology. Chinese stocks actually bottomed in November 2008, about five months ahead of the S&P 500 Index. As a result, China’s Shanghai Composite Index soared over +100% from November to August…but since then, shares suffered a decline of -23% in just four weeks. Likewise, technology has been one of the best performing US stock sectors since the rally began in March 2009. But since late July, while the S&P 500 surged +12% higher, tech stocks gained only +8%.

Should any of the indicators deteriorate further, it could be a signal that a correction could be imminent.