Beware the Bullish Sentiment

After hearing the third "guru" this week flag the fact that market returns have tended to be the greatest during periods bereft of earnings and that there are slim pickings during very strong earnings growth, something inside of me just snapped. With a straight face and unchallenged by their interviewers, these three bulls had the gall to use yet another statistic as further evidence that now was the time to really get aggressive. Presumably this came as new news to those folks, or they simply decided to ignore the fact that when interest rates were rising, strong earnings growth was the basis of their bullishness. Quite a contradiction, and rather silly, no?

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And, speaking of silly, how 'bout Henry Blodget, Mr. Internet himself, taking over coverage of Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks) Thursday morning at Merrill Lynch's "Be Bullish" shop? Now, I'm not judging Blodget's intelligence or analytical prowess because I don't know him, but it sure is a real head-scratcher why he would be tapped for such a high-visibility position within Merrill's research department. It's kinda like assigning Marc Rich to a high-level compliance position.

While Blodget only recently discovered that there are ratings other than buy and strong buy, he was quick to use the old accumulate designation for Microsoft. For once, I found myself agreeing with him -- not necessarily about the software giant's future performance, but rather with the notion that its dependence upon PC business makes it more vulnerable than ever before. But then, he's always been a Net-centric kind of guy. I wouldn't dismiss Bill Gates and the company's horde of cash, but I can't argue with taking some profits in a stock that's accounted for a huge percentage of the entire Nasdaq Composite Index's year-to-date gain.

Tech Sector: Battleground Central

While measured market sentiment continues to bubble up, the action on the Street of Dreams feels very heavy. As was the case last year, the battleground remains centered on the tech sector. The waters have become even murkier, with many now believing that so much negativity surrounds the tech sector and Naz that it's a good time to be a buyer. I can't argue with that opinion, but the charts still indicate that most of the still-expensive, onetime highfliers look perilous to one's financial well-being. Nevertheless, with so many crosscurrents whipping through the market and the Fed head apt to pull the trigger again when it's least expected, it's not the time to get very aggressive on the short side.

Bullish sentiment, as measured by the American Association of Individual Investors, jumped to 55.6%, and bearish sentiment continued to slide to its current reading of only 14.4% this week. And a reader kindly reminded me to take a look at the Ameritrade Online Investor Index, which was a very strong contra-indicator last year. On the heels of Cisco's (CSCO Quote - Cramer on CSCO - Stock Picks) bomb, 82.9% of Ameritrade's clients were buyers, and the index of buyers reached a whopping 94.1% from Tuesday's 51.4%. You can see how Wall Street analysts have become worse than irrelevant to Main Street, as a flock of them rushed to downgrade Cisco after the fact. Buy high, sell low?

When individuals become really discouraged and then disgusted, it's going to be very ugly. I just hope the dollar doesn't break simultaneously with another round of capitulation. You must be very confident that the tech stocks in your portfolio are solid, because there's a very good chance they'll be in there for quite some time and will elicit a good deal of pain before any capital gains can be taken. The Lucent (LU Quote - Cramer on LU - Stock Picks) news might not be an isolated case, considering the liberal accounting practices in use to make the past's ever-rising expectations last. Kudos again to Bob Olstein, who tabbed Lucent early and suffered a great deal of flak for puncturing that onetime darling's latex skin.

The Naz is extremely oversold, both on a short- and long-term basis. In fact, it's so oversold that you can't rule out strong moves when pullbacks stall. However, as many technical indicators fail to be as effective during a mania, I suspect that many traditional tools will also be less reliable on the other side of the slope. Still, the downtrend line in the Nasdaq 100 Unit Trust (QQQ Quote - Cramer on QQQ - Stock Picks) has yet to be violated, but my momentum indicators show that it's probably only a matter of time. It's no wonder that so many traders and investors seem to be dazed and confused, preferring to scamper into more defensive names and sectors rather than to take more dramatic actions. Hedging, for sure, is warranted as much now as it was at any time last year.

Be Nimble, Be Quick

I expect that bull traps will be sprung until the bears come out of hibernation in large numbers. (Isn't that usually in early spring?) So, the market will likely continue to favor the most nimble traders. Well-positioned investors should remain patient, holding a good slug of bonds, notes and bills until it's time to pounce again. Uncle Sam's and agencies are preferred.

Thursday was a blessedly slow, quiet sort of day, albeit one that saw the major market measures melt a little throughout the session after again putting in the top within the first hour. The top was in just after President Bush unveiled his hardly surprising income tax cut plan, as there was some selling on the news. However, with the Composite, the Nasdaq 100 and the S&P 500 all closing at their lows, we might see a bit more action heading into the weekend, although there's not much shaking in the Globex session.

Optimism that more rate cuts would stir consumer spending has helped to pump up the retailers and other consumer cyclicals recently. However, Thursday's same-store sales reports indicate that retailers are really struggling, even with very heavy discounting and promotional activity. Not a group to toy with here, as even the biggest and best such as Wal-Mart (WMT Quote - Cramer on WMT - Stock Picks) are getting whacked. I still believe Kohl's (KSS Quote - Cramer on KSS - Stock Picks) looks very vulnerable technically, but that can also be said of many others in the group. And it's way too soon to get heavily involved with deep cyclicals.

I'll repeat my opinion of the financials, particularly the banks and brokers: They should be avoided. And with techs and financials looking very dangerous, it's a very short leap of faith to conclude that the market is on very thin ice. And yes, I know the Fed is easing. So is the Bank of Japan. Now is not the time to be aggressive. When most folks who never met a market they didn't like turn, you'll likely have a very good opportunity to buy low once again. Have a very pleasant weekend.