Tags: bullish | bearish | red | flag

Indicators Are Very Close to Triggering a Red Flag

By Rick Pendergraft   |   Tuesday, 29 Jan 2013 07:39 AM

The market has been on an incredible run over the last 10 weeks. In all but two of the past 10 weeks, the Standard & Poor’s 500 has moved higher. We saw a similar rally in the first quarter of last year.

The rally has really heated up over the last few weeks, as the S&P 500 recorded gains for eight straight days, the longest such streak since 2004.

Unfortunately, with such a strong rally comes increasing optimism.

In the previous two weeks ago, I wrote about the CBOE Volatility Index and the Investors Intelligence report and how both were approaching levels like we saw last September.

With the market continuing to rally for the past two weeks, these indicators have yet to see a significant shift away from their optimistic levels. In fact, the Investors Intelligence ratio has moved higher.

Each of the two previous Investors Intelligence reports (Jan. 16 and Jan. 23) shows a 53.2 bullish percentage with a 22.3 bearish percentage. This gives us a ratio of 2.38 bulls for every bear.

Over my years of following the Investors Intelligence report, I have learned that when the ratio hits 2.5, it’s time to wave the red flag.

With the market climbing higher and higher, I look for the Investors Intelligence report, due out Wednesday, to produce that worrisome ratio reading.

I could be wrong, but the market is overbought on the daily, weekly and monthly charts, and when combined with the high levels of optimism, I will proceed cautiously.

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