I have been cautious about stocks for some time now, but over the last week there have been several warning signs flashed from several sentiment indicators.
The first one came from the Investors Intelligence report. Last week’s report showed a big jump in the bulls and a sharp drop in the bears.
The bullish percentage jumped from 44.2 percent to 50 percent, while the bearish percentage dropped from 21.1 percent to 18.8 percent. This puts the ratio of bulls to bears at 2.66, the highest reading in since March 2011. The 18.8 percent bearish percentage is the lowest reading since May 2011.
The second indicator signaling potential trouble is the CBOE Volatility Index (VIX). The VIX dropped as low as 11.05 last week, which is the lowest reading since February 2007.
Finally, the Rydex Nova/Ursa ratio dropped as low as 15.9 last week. The Nova fund is a bullish fund that seeks returns 1.5 times that of the Standard & Poor’s 500, while the Ursa fund is an inverse fund that moves opposite of the S&P 500.
The 15.9 reading from the ratio is the lowest reading in over two years.
With the S&P 500 moving up in 10 of the last 11 weeks, the index is as overbought as it has been in over five years.
When you combine the overbought levels with the overly optimistic sentiment readings, investors need to take this as a warning and take action to protect their portfolios.
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