Tags: Sincere | high five | bear | stocks

MarketWatch's Sincere: Watch Out for 'High-Five Effect' on Stocks

By    |   Tuesday, 23 September 2014 12:16 PM

Stock market bulls are becoming overconfident, and that's a dangerous sign for equities, says MarketWatch columnist Michael Sincere.

"At market tops, it is common to see what I call the 'high-five effect' — that is, investors giving high-fives to each other because they are making so much paper money," he writes.

"It's happening now. I'm also suspicious when amateurs come out of the woodwork to insult other investors."

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Another sign of investors' "irrational exuberance?" An Investors Intelligence survey shows that only 15.2 percent of investors are bearish, Sincere says.

"Many long-time bears are capitulating. If you look at market history, when bulls feel invincible and beaten-down bears give up, you have the makings of a market top."

So how should investors deal with the risk of a market plunge?
  • "Take some money off the table and move into cash.
  • "Buy protective put options.
  • "Use stop losses to lock in gains.
  • "Be alert to deteriorating market conditions," Sincere writes.
"If you are one of the few bears still standing, it's not easy fighting the herd," he notes.

"To the bears who have given up hope: Don't forget why you have refused to participate in a faux bull market that is pretty on the outside but deteriorating on the inside. If you look at previous market cycles, just when it seems too easy to make money, the bear appears and takes a huge bite."

If stocks do crash, the Financial Times identifies seven warning signs that analysts will point to in their post-mortems.
  • Leveraged loans to privately held companies have surged.
  • Junk bond yields have plummeted.
  • Initial public offerings are partying like it's 1999.
  • Merger and acquisition activity is soaring.
  • Companies are taking on debt to buy back their shares.
  • Valuations are stretched. The S&P 500 had a trailing price-earnings ratio of 19.36 Friday, up from 18.56 a year ago, according to Birinyi Associates.
  • The Federal Reserve's quantitative easing is coming to an end.
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Stock market bulls are becoming overconfident, and that's a dangerous sign for equities, says MarketWatch columnist Michael Sincere.
Sincere, high five, bear, stocks
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2014-16-23
Tuesday, 23 September 2014 12:16 PM
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