The Steve Puetz Letter

20 Reasons to Sell Stocks Now

June 23, 1997
The stock market is in the clutches of the greatest financial mania of all time. Some people know it's a mania, but stay in anyway. They want to ride the trend as long as they can while the trend is still up. Others are oblivious to the mania. They believe stocks always go up in the long-term, so the only decision for them is how much to buy.

Yet, any serious student of the markets knows that every bull market always come to an end. When the bull market is a mania, the following bear market often lasts many years -- usually well over a decade. Hence, it's not a good idea to try to ride out the coming bear market in stocks.

Presently, there are a number of warning signs that indicate the final top is in the process of being completed. Some of these indicators are flashing urgent sell signals. Hence, now is the perfect time to sell stocks. Following are the warning signs:

ALERT 1) This is the second week in a row of near-record volume. The 2-week volume is a record for consecutive weeks. It has been a 2-week melt-up, reverse-crash, buying-panic -- whatever you want to call it.

ALERT 2) London has often been a leading indicator for New York stocks. The nearly 200 point break in London's FTSE-100 Index last week (equal to about 350 Dow points) portends trouble for the DJIA.

ALERT 3) Corporations are heavily dumping securities onto the public. For the week ending June 13th, $20.0 billion of bonds were sold (3rd highest on record) and $4.2 billion of stocks were sold (14th highest ever). For the week just ended on June 20th, $32.1 billion of bonds were sold (a new record) and $8.0 billion of stocks were sold (a new record). The combined $40 billion of stocks and bonds sold last week was about a half-years supply back in the early 1980s! The amount of securities being dumped onto the public is mind-boggling. It's a perfect example of distribution at the top.

ALERT 4) The most recent American Association of Individual Investors (AAII) sentiment poll shows 59% of their members are bullish. That's one of the highest readings on record. Other high numbers include 66% bullish the week the DJIA peaked in August 1987 before the crash, and 63% bullish 2 weeks before the March-April break earlier this year. This is a contrary indicator giving a sell warning.

ALERT 5) The most recent Market Vane poll of stock market bulls shows 80% bullish -- the highest number of bulls since I started tracking it in 1994. This is a contrary indicator that's giving a clear-cut sell signal.

ALERT 6) I keep a composite sentiment-poll for the financial markets. The poll consists of 4 stock market surveys (Investors Intelligence, AAII, Consensus, and Market Vane), 2 bond market surveys (Consensus and Market Vane), and 2 Eurodollar surveys (Consensus and Market Vane). I started recording this composite index in 1994. This past week, the index rose to its highest level ever -- at 537. Other high points were: 499 on 6-23-95 -- a 2 month consolidation period followed for the DJIA 495 on 2-16-96 -- a 5 month consolidation followed for stocks. 532 on 11-29-96 -- right before the "irrational exuberance" break. 493 on 2-28-97 -- 2 weeks before the 10% decline during March-April of 1997. Caution is certainly in order with the index now at 537!

ALERT 7) The 10-day ARMS INDEX (which measures the volume going into advancing and declining issues on the NYSE) gave a sell signal this past week.

ALERT 8) The DJIA last-hour indicator gave a sell signal on Friday. This indicator takes only the change in the DJIA for the last hour of trading, and keeps a cumulative total. The index peaked on 5-5-97 at 6180. It then fell to 6035 on 5-9-97. After that, it recovered to 6145 on 5-30-97. Then, on Friday 6-20-97, it dropped to 6003 -- falling below the 5-9-97 low -- thus, giving a sell signal. The last-hour-of-trading index usually forewarns of trend changes in the DJIA. It accurately did so before the 1987 crash. It's now warning to sell stocks immediately.

ALERT 9) The Dow Utilities have failed to move into new high territory with the DJIA. Such a divergence is normally bearish for the DJIA. The Dow Utilities almost always change trend ahead of the Dow Industrials.

ALERT 10) OEX Put/Call open-interest now stands at 68.4% puts. Any reading above 65% gives a sell signal.

ALERT 11) Speculation is running rampant. Junk bond issuance is running at record levels. Brady Bonds are popular. Whatever is risky, speculators are buying like there's no tomorrow. In the past, similar periods of "froth" have marked important turning points for the market.

ALERT 12) Speculators in S&P 500 futures have just accumulated one of their largest long positions ever. This works as an excellent contrary indicator. For example, instead of being long at the bottom on 4-18-97, they were short 18,800 contracts. Since then, they have covered their shorts, and they have now accumulated a LONG position of 5,800 contracts. The present situation comes closest to matching what happened during August 1987. Back then, speculators were short 23,500 contracts at the end of July 1987. During August, they first went on a massive short-covering spree. Then, they jumped into the market by going long 4,300 contracts at the top -- right before stocks crashed! When speculators are long S&P futures, as they are now, you want to be OUT of stocks!

ALERT 13) Speculation is just as rampant in Treasury Bond futures. Specs went from 30,000 contract short on 4-25-97 to 32,300 contracts long on 6-20-97. That is a near-record long position in Treasury bonds. And it's another contrary indicator saying to sell now. This indicator is warning that bonds are likely to move lower. With bonds going down, it will be twice as hard for stocks to keep moving up.

ALERT 14) Bearishness is building for the ANTI-DOW -- gold. The latest CFTC report shows large speculators are short 36,000 contracts of Comex gold futures. As a contrary indicator, that's bullish for gold. Gold usually moves opposite to the DJIA. With the technical situation for gold improving, a sudden gold-rally would be bearish for the DJIA.

ALERT 15) The CBOE call/put ratio of daily trading volume has been unusually high for the past month. That's very bearish. This indicator is giving an urgent sell signal for stocks.

ALERT 16) The CRB commodity index has declined sharply during June. This signals that deflationary pressures are mounting. And that means that corporate profits are likely to turn lower rather soon.

ALERT 17) The S&P 500 Price/Earnings ratio now stands at 22.3-to-1, one of the highest levels ever, and a clear sign that stock prices are too high.

ALERT 18) The S&P Industrial dividend yield is now down to 1.57%. To be normally valued, the dividend yield should be between 4.5% and 5.0%. In other words, S&P stocks are at least 3 times higher than they should be. The S&P 500 should be at 300 instead of 900. And the Dow Industrials should be trading at 2600 instead of 7800.

ALERT 19) Retail sales have declined for 3 consecutive months. This is usually a sign that a recession has started. The last time the economy peaked ahead of the stock market was in the year 1929.

ALERT 20) Quarterly window dressing is usually complete 1 week before the end of the quarter (for cash settlement purposes). Hence, stock purchases made to get rid of cash holdings (these days, most investors think cash is trash) have probably already been completed. As a result, a buying vacuum is likely to appear during the next few weeks. At these lofty, that may signal a stock market crash is just around the corner!

CONCLUSION: Sell stocks now, and move  your investments into gold and silver coins.
The term “carat” comes from “carob seed,” which was standard for weighing small quantities in the Middle East.