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.