Warning shots are being fired.
For the first time in many weeks one of our indicators has delivered a sell signal. Our market leadership model needle is pointed at sell. We also noticed the breakdown on the charts as the NASDAQ crossed under the S&P 500 in terms of performance. The NASDAQ has led the way during this rally up, pay close attention to the lead dog. If it stops pulling the sled, eventually the sled stops moving in that direction.
Despite the markets' continued push upwards, our momentum models lost traction for the 3rd week in a row. For now it is still in buy territory, but one or two soft days and it will be in real danger of pointing at sell too.
Our real fear is that the indexes trade in what we call a triangle pattern (see chart below). We saw this same pattern in our Stock Market Report on June 12th of 2008 and warned investors to get out when the DOW Jones Industrials were at 12,200.
Our call comes a lot earlier in the chart pattern this time which leaves us some wiggle room. We would be very careful in the days ahead and think about pulling some profits off the table. Investors might be wise to hedge against any fall in stock prices by putting some dollars to work in a reverse ETF. ProShares Short QQQ (PSQ) will return the opposite of the daily performance of the NASDAQ-100 Index®. If the index goes down PSQ goes up. For more excitement, ProShares Ultra Short QQQ (QID) doubles the fun.
A more market neutral trading strategy or hedge would be to buy the ProShares Short QQQ (PSQ) (shorting the NASDAQ) and buying SPDR S&P 500 ETF (SPY) (long the S&P 500). If the market falls and the NASDAQ falls faster than the S&P 500, you will profit. If the markets rise and the S&P 500 outperforms the NASDAQ, you will profit. Earlier we noted that the NASDAQ crossed under the S&P 500 performance wise.
Remember the old saying “go away in May and come back October’s last trading day.” The dog days of summer are here.
UPDATE: Looks like Merrill’s ex-economist agrees with us that the stock market could be overvalued.