NEW YORK (TheStreet) -- As Sir John Templeton once said, bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.
We are getting to the eurphoric stage.
The four major stock indexes finished in the green on Tuesday, ahead of the Federal Reserve Open Market Committee announcement on Wednesday.
The DJIA finished higher by 27.48 points at 16808.49 while the S&P 500 was up 4.21 to close at 1941.99. The Nasdaq was higher by 16.13 at 4337.23 and the Russell 2000 was up 9.80 to close at 1176.62.
This was the third day in a row the up volume had no buying conviction behind it. The previous down day, on June 12, had in excess of 100 million shares traded in the S&P 500 Trust Series ETF (SPY).
Thus, the markets continue to be held up by the Federal Reserve and its policy statement Wednesday. It has become very unfortunate the stock market and the Federal Reserve are one and the same. I do not think the stock market was intended to be controlled by FED policy. Fundamental stock and technical analysis has taken a back seat.
The most extraordinarily overbought sector continues to be the semiconductor stocks. The Market Vectors Semiconductor ETF (SMH) has a 99.24 algorithm number. That is on the daily chart. Both the weekly and monthly algorithm numbers are also in overbought territory. That is also called froth and euphoria. These numbers can be found at www.strategicstocktrade.com.
The Russell 2000 index is now showing signs of overheating on the daily charts. This comes on the heels of Trend Bearish signal. The Russell 2000 is down almost 3% from its March 2014 highs.
The small-cap stocks, stocks with a market cap less than $4 billion according to my internal process, are signaling a 19:1 ratio of Extraordinarily overbought versus extraordinarily oversold stocks. This is froth and euphoria.
Moving on to some economic numbers released on Tuesday, the Consumer Price Index (CPI) showed a +0.4% gain versus an expected gain of 0.2%. This is known as inflation accelerating and something that I have been mentioning for some time now in my articles.
The three sectors that are bullish and you want to own as traders and investors in 2014 are the Select Sector Energy ETF (XLE) the Select Sector Utilities (XLU) and the Vanguard REIT ETF (VNQ). The three sectors you do not want to own are the consumer discretionary, housing and financial sectors.
In summary, I continue to be extremely cautious with this market. The buy signals are just not there and the sell signals are in abundance, along with many negative divergences.
At the close of trading on Tuesday, I continued to be short Broadcom (BRCM) and Fairchild Semiconductor (FCS). I also added a new long position in Deutsche Bank (DB). This has an extraordinarily oversold number, one of the very few in the large-cap sector.
At the time of publication the author was short BRCM and FCS and long DB.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.