In recent weeks flock investors have been busy buying equity funds in a significant manner. This net inflow is happening after valuations had already become way too high. The media have been bombarding flock traders and amateurs with exciting news such as Apple going to $1000, S&P 500 (SPY) going to 1,450, Dow to 13,000, QQQ reaching an intraday high of $65.07, and the mighty NASDAQ hitting the 3,000 mark.
If you look back at the previous market alarm warnings (i.e. 2007, 2008, 2010, and 2011), increasing negative divergences of leading versus lagging indicators, as well as massive insider selling, were extremely pronounced during each occasion. It is unlikely to be any different this time. The only difference might be that if the optimism of average investor intensifies then the correction will be more dramatic. You should get used to this semi-annual up and down pattern. We are of the opinion that this pattern will most likely persist for a couple of more years.
What should you do? Keep focused on the important and reliable signals and not the media. They are in the business of writing about what is hot and the flavour of the month. It is imperative to be ahead of the crowd. Patterns of negative divergence should be your focus as well as having cash on hand to invest when fear sets in the street. There will be an intermediate-term buying opportunity soon allowing us to take advantage of a short term up swing. We are ready for whatever the market gives us.