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How Long Will Stock Market Exuberance Last?

Yet, if we review the last 15 years, we find that "risk-on" investing meant choosing small company stocks from the fastest growing economies worldwide. With China's economy turning a corner in the fourth quarter of 2012, small-cap emergers via EWX have celebrated in phenomenal fashion.

It should be noted, though, EWX is flashing severely "overbought" warning signals. The last 3 times that EWX experienced Relative Strength Index readings at these levels, the asset went on to register losses of roughly -17%, -33% and -14% respectively. A correction may or may not occur here, but bullish investors should probably wait for a 7%-8% pullback before entering at this stage.

3. SPDR Select Utilities (XLU). For the last three years, it's been a relatively pain-free ride higher. Still, the recent declines from 52-week highs has a number of folks warning that the safer haven stock segment is "overvalued."

Maybe so. However, the more important issue here would be to monitor whether XLU can stay near its 200-day trendline. If it falls dramatically lower, that might be an early indication that investors fear a spike in interest rates. If XLU moves dramatically higher, that might be an indication of indiscriminate enthusiasm.

Many investors in utility stocks select the non-cyclical segment to avoid the rocky road; they prefer a smooth ride higher. Hugging the long-term trend would be a positive for these markets, whereas a dramatic swing in utilities might be a warning shot across the stock bow.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

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