Stock market rally is terminal …

by Elliott Wave Financial Forecast

With summer coming to an end and the stock market once again at new highs, is it time for the bears to prepare for a long, cold winter, or is there more excitement to come before the end of 2014?
Inside the just-published Elliott Wave Financial Forecast, Editors Steve Hochberg and Pete Kendall reveal important market signals both bulls and bears should be aware of, right now.

"Many market bears appear to have given up publicly, as one long time measure of advisor bearishness is within a hair's breadth of a multi-decade low. But the closing high for the Russell 2000 index of small-cap stocks occurred six months ago in March, and the S&P 500's new high [last] week occurred with less than 10% of its members at new 52-week highs. These conditions, among many others, indicate the stock market rally is terminal. ..."

Steve and Pete continue ...

"Investors Intelligence recorded just 15.1% bearish advisors in their current weekly survey, which, except for December of last year, matches the lowest total since 1987. The bullish plurality in the weekly American Association of Individual Investors poll, a cautious group in general, jumped to 32.7%, the highest extreme for the year and the third highest in eight years. The percentage of sentiment indicators tracked by SentimenTrader.com that are "bullish for stocks" is zero. ... These measures depict an epic optimism that doesn't just disappear; it can be reversed only by a huge bear market."

But, as you know, sentiment can be a fickle indicator. Is there any more evidence that a reversal may be coming soon? Steve and Pete uncover a historical comparison that should catch your eye.

"A key milestone in the prelude to the stock market's 2007 peak came in the week of July 16, 2007, when Bear Stearns announced that two of its subprime mortgage funds had lost nearly all of their value. The firm liquidated the funds two weeks later and by August a 'worldwide' credit crunch was on, as subprime mortgage-backed bonds were 'discovered' in the portfolios of banks and hedge funds from Paris to China. The Dow Jones Composite Index topped that week and started a 54% decline, but the Dow Industrials and S&P 500 made a slightly higher high in October 2007 before tumbling into their biggest declines since the Great Depression. By March 2008, Bear Stearns, an 85-year stalwart of Wall Street, was bankrupt and forced to sell itself to JP Morgan Chase.
"In recent weeks, the specter of global debt default is once again rearing its head. On August 1, Argentina defaulted on its sovereign debt, which occurred on the heels of bond defaults in South African and Portuguese banks. Meanwhile, Chinese property companies are starting to fail in the same way that subprime funds imploded in mid-2007. We think these scattered pockets of default are a prelude to the upcoming debacle."