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Sell Signal?

Back in November, during the post-election hysteria, the NYT published an article describing individual investors cashing out over fears of tax increases, or something. In an Instablog (my first and only until now), I posited that might have been a strong buy signal. (Interestingly, one of the people mentioned in the article commented on the post.)

Here we are two months later, and the market has soared to new highs; turns out, that was in fact an accurate buy signal. And today the NYT has an article describing individual investors piling back into stocks! You can see where this is going, can't you?

Most of the negative sentiment over the past couple of years has been driven by politics and/or governmental issues. Business has actually been doing pretty well, in spite of the tepid economic growth rates. So when the headline fears dissipate, it's natural to see a strong rally in stocks, as has happened ever since the "fiscal cliff" hysteria evaporated. The next big fear, a repeat of the debt ceiling debacle, evaporated when the GOP realized they were riding a losing horse. Greece is apparently on track for a balanced budget; to almost everyone's amazement (except Jeff Miller), Europe seems not to be dissolving after all.

So it's logical that the stock market would rally, as it has. Yet all good things must end, especially stock market rallies. I don't think we are in a "bubble" (PEs are still relatively low for many blue-chip stocks), but when small investors (like me!) pile in, it makes me nervous.

On Friday I spent much of the day setting trailing stops under some of my winners. I will probably do more of this next week. The market is due for a few down days anyway, so I want to be careful about the width of the trail; this part always gives me fits. I hate getting stopped out of a perfectly good stock by a one-day (or less) drop-and-bounce. And many people have been noting the lack of inflows to stocks and mutual funds - and the odd flows into bond funds, which seem like sure losers at this point - predicting a strong bull market when that reverses. Perhaps that is here, and we have a good run ahead of us. But I regard this NYT article as a warning, and I will be trying to minimize my risk and hold onto the gains I've made so far.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.