Don’t Be Fooled By Multi-Year Stock Market Highs: Dow Jones Industrial Average 2 Minute, Russell 2000, S&P 500

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February 27, 2013 12:01pm NYSE:DIA NYSE:IWM

bearbull21George Leong: The equities market continues to hover near its multi-year highs. There are still many Wall Street analysts who suggest that the bulls are in full control and will drive stocks higher.

Investor sentiment had been extremely bullish in each session since the start of the year, but a neutral rating was reported on February 21–22.

We are still seeing optimism on Wall Street from the bulls, with some market watchers calling for the Dow Jones Industrial Average (INDEXDJX:.DJI) to crack 15,000, and move upward toward 20,000. Even the small-cap Russell 2000 (INDEXRUSSELL:RUT), which recently traded at a record high, is up nearly 10% this year. Based on an annualized rate, the Russell 2000 would advance over 60% this year, considering what has happened so far. I actually think some of the euphoria in the equities market is overblown.

While Wall Street and the media may still feel the equities market will continue to move higher, I believe there’s some real risk in the equities market that you should be aware of as shown in the chart below.


Chart courtesy of

While I’m not calling for a stock market correction, I do see red flags out there that suggest some selling pressure may be on the horizon for the equities market.

Take a look at the Dow. The blue-chip index has failed on two occasions to hold above 14,000, so there appears to be some topping action, based on my technical analysis. The reality is that selling in blue chips would be a red flag in the equities market.

In the broader market, while the S&P 500 (INDEXSP:.INX) initially held at 1,500, the index did see an intraday breach below 1,500 on February 21. My concern is that the potential topping at 1,500, which I have discussed before in these pages, occurred in 2000 and 2007, so we may be looking at a third multi-year top at this time, based on my technical analysis.

S&P 500 large Cap Index Chart

Chart courtesy of

Just take a look at the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), which is also widely known as the “fear factor” and is based on the S&P 500. The VIX reading surged above 15 last Friday, which is well below some of the high readings since 1990, as shown on the chart below. The lower VIX reading means the market is relaxed and unconcerned with the current climate; but you need to remain alert, as investor mistakes occur when you are too confident.

Volatility Index Chart

Chart courtesy of

Indications on the charts and in the market suggest there may be a near-term top surfacing in the equities market, so you will need to be really aware of this. Just the rapid rise in stocks this year should give you a sense of concern, as gains are clearly not sustainable.

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At this juncture, I advise adopting a wait-and-see approach toward the equities market.

As a precaution to a possible stock market correction, you should make sure you are hedged via the use of index put options on key stock indices, such as the S&P 500, the NASDAQ, and the Dow, amongst others.

If the equities market sinks, you can also pick up some gold investments as a hedge and a safe haven for your capital.

This article is brought to you courtesy of George Leong from Profit Confidential.

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