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Caution Signs

|Includes: DIA, GS, iShares Russell 2000 ETF (IWM), QQQ, SPY

I think its a time for extreme caution in the stock market and here's why:

The investor sentiment as measured by the put/call ratio is off the charts.   People have not been this bullish in a long, long time.   The senitment is a contrary indicator:  the market often goes down after the majority of people reach a bullish extreme.   That is, once everyone is convinced the market will go up, it often goes down.

Optimistic sentiment by itself is not a concern until a something happens to turn the tide.  The Goldman Sachs situation may be just that catalyst.  It has the potential to be bad news for more than just GS and Meg Whitman.

Now each of the major US indices looks troubled.  The NASDAQ QQQQ shows it loss of momentum with negative (bearish) divergences on the MACD and MACD Histogram on both the weekly and daily charts.   This is the first bearish MACD divergences on the weekly charts of QQQQ since 2007.    See my previous instablog post for background on MACD and divergences.

The S&P500 doesn't presently have weekly divergences between the MACD indicator and price. That's not good news though because it came about largely because the index was unable to rise to a new high.   The SPY chart has a bit of a head and shoulders pattern that looks very much in need of a chiropractor - it is listing down to the right - not a good sign.

For another perspective, you can click to watch this video about the Dow and its potential difficulties.

The Russell 2000 (NYSEARCA:IWM) looks stronger but consider that it could shed 10% without breaking the current dive.

Last week saw the broad market take a dive. While it did bounce back somewhat, that volatility itself is a worrisome sign.

As usual, the markets send a mixed message.  Still, if you are in the bullish majority, it is wise to pause to consider the caution signs.   This is the kind of market where its good to know your exit strategy before things get too rough.

Disclosure: I hold a GS bond but no positions in any of the ETFs mentioned. My company is an affiliate of Market Club and may be compensated if you click that link.