Is The Stock Market Too High?

We have been getting a lot of calls asking: Is the stock market too high? There is an old story how Joe Kennedy knew (back in the 1920’s) it was time to get out of stocks when a shoe shine boy gave him stock tips.

Nearly a hundred years later, folks are still trying to answer the question: is the stock market too high? A good indicator we may possibly be nearing a short-term top in the stock market is the “magazine cover indicator.” Main Street often falls behind Wall Street, and a good way to point this out are with current magazine covers. Much has been written about the magazine cover indicator (as a contra-indicator) across Wall Street, including my friends at Dorsey Wright & Associates.

While many individual investors are fearful of losing money in the market when the bullish percent are at lows, the truth is there are plenty of bargains to be had at those times. When the market gets lofty, individuals want to throw money at the market. Take a look at the image nearby.

The magazine cover on the bottom (headline: “Nowhere To Hide”) was published in October 2011. This was when one of our main indicators, the bullish percent for the New York Stock Exchange, was at one of it’s lowest points. In fact, the bullish percent was at or below 30%. This is typically a very good entry point into the market.

The big problem is the bullish percent indicator drops this low often after a serious down-draft in the markets. So, confidence — at these points — are low. And it is psychologically (and emotionally) very difficult for most folks to BUY at these levels.

But it’s the RIGHT thing to do.

Now, lets look at the magazine cover on the top. “Wall Street is Back.” It’s very interesting to note the very same chart — one of our primary indicators, the bullish percent for the New York Stock Exchange, is now at a high-risk level (over 70%). So, while individuals are gaining more and more confidence about investing in stocks again, we privately wonder: is the stock market too high?

And please note this bullish percent chart has recently reversed into a column of O’s. That is typically a warning flag for those that follow point and figure technical analysis. Even though (on the day of this post) this chart is close to reversing back up into a column of X’s, it’s amazing to see a very different picture the chart displays: we are in a high-risk area of the market.

And while we currently sit in a high risk region, the magazine cover intimates “it’s cool to talk talk about Wall Street and stocks again.”