The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- At
, we have been concerned with a possible correction into the May/June timeframe, and there are certain indicators that are forecasting this potential. We will list and discuss some of these indicators.
The first indicator is investor sentiment. We follow
numbers, but only the Bears, and % Bears has been consistently below 20% for the last four weeks. While Sentiment is not a timing tool, it does tell us conditions in which too many people are bullish, and a surprise event that shakes investor confidence could occur at any time sparking a sharp selloff. These numbers are published with a lag so the chart below does not appear to be up to date.
We have been seeing some interesting sector rotation that is often indicative of changes in the market. Since January, leadership has changed to Consumer Staples from Technology. This is normally a defensive sector, and this sort of shift often forecasts a correction.
Coupled with the recent decline in commodities, and strength in the dollar, there are two interesting things this could mean. First, this could mean that foreign money is coming into our market. While this has got some positive implications for the longer term, this could cause a sharp drop in our stock market if there is a short-term euro crisis, as it did last year, and has at other times.
There are certainly some signs the dollar is going to rally, and there may be some ways to take advantage of this. We show the Monthly chart of the US dollar index below, and note the support that so far, is holding from the lows in 2009. This market is doing better than perceptions indicate; most people believe the dollar is at new lows.
At the same time, the ETF on the dollar, the UUP, has broken those lows. Should the dollar rise, this ETF may very well rise even more than the Dollar Index, and represents an interesting speculation for accounts that are willing to take on some risk.
In conclusion, some of the factors we look at suggest there could be a correction. Many indicators are stretched, and when changes such as these occur, it is often the last phase of a rally before the correction.
We advocate holding cash that has been raised for now, waiting to redeploy on a market setback. For those of you who wish to add money, immediately, do so in the strongest emerging sectors, as we believe the changes in leadership we are seeing now will persist into the end of the year.
Fred Meissner is founder and publisher of
. Fred is a CMT and past President of the Market Technicians Association (MTA). He recently left Merrill Lynch's Market Analysis Department and Sector Strategy Department to form The Fred Report.�A detailed bio is here: