Market Red Alert: Oprah Guest Says 'Buy'

Yesterday I walked through the living room while my wife was watching Oprah, and there was an “expert” on there saying that the market had nowhere to go but up. The viewers were advised to run out and buy stocks. I think the Oprah show may have become the prime contrarian indicator for the 21st century, replacing the cover of Time magazine.

I am enjoying this rally as much as anyone, but it is important to recognize that all the conditions for a major market top are in place and a severe selloff could start at any time.

The yield curve shows that the bond market has been forecasting a recession for months, and recent steepening of the curve suggests that the recession could become severe and prolonged.

But the stock market is rallying as if we were embarking on an economic boom.

When the stock market is having an argument with the bond market about the future, the bond market almost always wins.

The percentage of stocks rallying is very high. More than 400 of the S&P 500 stocks are trading above their 50 day moving averages.

Likewise, the NYSE Bullish Percent Index is over 70. This index level is associated with market tops. All market sectors except health care and information technology appear severely overbought.

Smugness and bullish sentiment are very high. The VIX has reached a level only seen at market tops.

The difference between new highs and new lows on the NYSE is in an area associated with short-term tops. There were only two new lows on the NYSE yesterday.

But today’s buyers will become tomorrow’s sellers when the tide turns. I think this is a good time to stick with low-volatility stocks paying good dividends and maintain a large cash reserve.

Comments

[Angelo George:]

It is hard to find fault with this view point. Being 78 years old I have seen this topping occur many times. Selective short positions could be very lucritive.

2006 Nov 16 05:21 PM

[CrossProfit_:]

We have been consistently bullish in 2006, including throughout the early summer pullback. As we stated then, the pullback was over fairly quickly. We are still bullish for H1 2007.

We now anticipate another short lived pullback to allow the 50 DMA to catch up. Certain technology, biotech and solar power stocks (not all alternative energy) should fair better. Possible takeover candidates will become the focus over the next 6 weeks. Oil service companies may get hit harder than the rest of the market but should recover in 2007.
If you have shorted the oil E&P stocks, this may be your last opportunity to get out, most likely with a small loss.

The S&P 500 is overbought (our favorites are going out of favor) however the Russell 2000 is not. Expect some choppy sessions between now and year end with the markets closing the year roughly at today’s levels with the third and final sector rotation for the year playing itself out.

Disclosure: Opinion of CrossProfit analyst reflecting consensus at CrossProfit.com. No position in XOM, CVX, COP, NBR, RIG (choppy to EOY, bullish bias). Short NR as of 11/16/06.
www.crossprofit.com

2006 Nov 17 04:55 AM

[User 1:]

11/17/06 9:59 AM: We covered our short position @ $6.41 for a one day 4.9% profit.

2006 Nov 17 09:59 AM