Investor optimism in stocks is becoming more widespread. Last week's NAAIM Exposure Index, which measures the exposure of active management investment professionals to the U.S. equities market, rose to 101, which is the highest level since December of 2013. The trading sentiment composite has moved to a "sell signal" and last week saw an 11 on the (VIX)  volatility index. Excessive optimism is universal.

We are entering an interesting time of the year for investors. Is this stock market going to break out to the upside and rally to further new highs, or will this latest lull be followed by a painful reversal of fortune -- a crash? Historically, the August-September time frame is the danger zone for the stock market.

Investors are driven by two emotions: fear and greed. Too much fear can sink stocks well below where they should be, whereas when investors become greedy, they can bid up stock prices too high.

Right now, everyone is greedy, so it might be time for smart investors to sell. 

The signals are there. 

"Goldman Turns Outright Bearish: Says to 'Sell' Stocks Over Next 3 Months," writes market commentator Hedge fund manager Stan Druckenmiller recommended that investors sell their equity holdings. And today, Republican presidential candidate and businessman Donald Trump recommended Americans sell their stock holdings in their 401(k) accounts. 

The U.S. stock market has skyrocketed towards record highs after encountering troubles earlier this year. Chinese markets have stabilized. I still remain skeptical of the Chinese economy, which has crashed. The fallout from any unwinding of Chinese investments will most likely have global implications.

Is the Rally in the U.S. Dollar Over?

The release of the weak GDP number last Friday caused a significant drop in the dollar. I do not believe investors will look at the dollar as a safe haven any longer. They flocked to the dollar because they thought that the Federal Reserve would raise interest rates later this year, thus producing a stronger dollar. After seeing Friday's numbers, the chance of that happening is near zero.

As I had stated last week, the Fed would not raise interest rates before the U.S. presidential election. Instead, the Fed would do everything possible to be accommodating so as to make sure that the economy and stock markets exhibit signs of strength while entering into the election. The Fed announcement last week reflected precisely that. There would be no change in short-term interest rates. On that news, the dollar fell hard, and I was short the dollar with an inverse ETF, (UDN) - Get Report , and, consequently, made a very quick profit for the sharp drop in the dollar.

My longer-term chart for the dollar is very bearish. With the dollar near 97 Right now, there is a long-term pattern that projects a move down to the 75 level sometime next year.

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A big decline for the dollar does not bode well for interest rates or the economy. So, with the dollar about to begin a major decline, gold and silver will be a very nice place to be invested.

Friday's trading action was all about the GDP numbers. They were horrible. The data showed that the U.S. economy only grew at a disappointing rate of 1.2% within the second quarter. This combined with a downward revision to the first three months of the year to produce an average growth rate of just 1%.

Wall Street expected a 2.6% increase. Therefore, you have to wonder about what the Fed was saying earlier in the week when it expressed confidence in the economy. Economic growth continues to contract. With interest rates near zero, we should be growing quickly, but we are not. While GDP growth remains anemic, there will be no wage increases or many new jobs created. In Japan, the BOJ added some measures but did not satisfy the markets' hunger.

I figure the S&P 500 is due for a correction to start within the next 10 trading days. Many things like sentiment, put/call ratio, volatility index and recent strength in safe-haven assets like the price of gold, indicate smart money is rotating out of stocks and into defensive positions as of this writing. Meanwhile, the average market participant is becoming overly bullish on stocks and buying at new all-time highs.

We have a couple new ETF trades that should trigger this week, which might post explosive moves that could last five weeks in length.


Check out my audio interview: This pattern suggest markets are getting very close to a significant top, but the momentum has still not shifted to the downside.

This article is commentary by an independent contributor. Chris Vermeulen is full-time trader and research analyst for TheGoldAndOilGuy Newsletter.