Our Cyclical Trend Score (NYSE:CTS) searches for likely cyclical inflection points in the stock market through the analysis of a large basket of fundamental, technical, internal and sentiment data. When market sentiment rises to a bullish extreme, our sentiment score often declines into sell territory, indicating that the rally has become vulnerable to the development of a correction. This week, the sentiment score entered sell territory for the first time since April 2012.
Notice that every time the score has declined into the red area, a violent correction has followed. This type of market behavior is typical during late-stage cyclical bull markets that occur during secular bear markets. Additionally, as we noted yesterday, the current short-term uptrend from November has been rising at an unsustainable rate, so it will likely be followed by a potentially violent overbought correction. Therefore, short-term risk is high and traders should prepare for the likely development of a meaningful retracement sometime during the next several weeks.