Why Investors Should Be Worried About the Number 3.188

Tuesday, 05 Nov 2013 07:17 AM

By Rick Pendergraft

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Recently, I have commented on how overbought the Standard & Poor's 500 has become in the last few months. Looking at the 10-week relative strength index, the indicator has not dipped below 50 since last December, making it 11 straight months above this level.

The last time we went this long without the indicator dropping below the midway point was from April 2003 through March 2004. After that extended stretch, the index moved lower during the next six months, with the index shedding approximately 7 percent.

That is only the technical picture. The sentiment picture is what really concerns me right now.

Last week's Investors Intelligence report set several multi-year records. First, the bearish percentage dropped to 16.5 percent, which is the lowest reading since the spring of 2011.

The bullish percentage jumped to 52.6 percent, and this put the ratio of bulls to bears at 3.188 to one. The last time this ratio was above 3 was early in the second quarter of 2011.

If you recall, the S&P 500 moved sideways for most of the second quarter of 2011 before dropping sharply in the fall that year.

Right now, I am very concerned about the overall market. It is overbought and overly loved.

I see a correction in the near future. It might not happen this week or even this month, but the bullish sentiment and buying pace can't be maintained for much longer without a little pressure being let out of the market.

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