If you look at the chart below it reveals there are some serious warning signals even as many major indexes have been hitting new highs.

Here is the latest Investors Intelligence report along with the all-important sentiment chart:  With no sign of an end to Fed stimulus equities seemingly remain the only game in town for capital appreciation.  Q3 earnings continue slightly above forecasts.  Technical indicators have started negative divergences with retreats from prior highs though, and last week ended with a second straight reading above 380 buying climaxes.  The newsletter editors were even more bullish and other Sentiment measures have also achieved very worrisome levels.  Conditions are building for some corrective relief.

The bulls reached 55.2%, up from 52.6% a week ago and now in danger territory.  After a 12.9% surge in three weeks their number is now just equal to their May 2013 peak.  Stocks retreated from there through June. The last higher number of bulls was 57.3% in April 2011.  The SPX was down 18% late that summer.  The high reading suggests portfolios are near fully invested and points to increased risk.  The last time the bulls exceeded 60% was late October 2007.

The bears fell to another 2013 low at 15.6% from 16.5% the prior week.  April 2011 had the bears at 15.7%, the last reading around the current level.  The majority of the remaining bears are clearly frustrated that the market hasn't reacted as they expected so a few capitulate with a shift each week.  The remaining bears expect a major sell-off whenever economic conditions do change the Fed bond buying program.

The difference between the bulls and bears increased further to 39.6%, from 36.1% last issue.  The last three weekly spreads have been in negative territory above 30% and now we see a high for the year, well above the 36.4% difference from mid-May.  A difference of 41.6% occurred in April 2011.  Just two months ago the spread was 13.4%, close to the 10% (or less) reading that allows for buying.  Readings are now pointing to a market top.  The bears haven't outnumbered the bulls (negative spread) since October 2011, after the correction from highs that April.

This chart shows the bulls are now more than 3.5X the bears, another reading comparable to April 2011.  Note the market didn't tumble immediately from there but was decisively lower a few months later and the ratio had fallen below 1. 

King World News note:  The bottom line here is that the reading above is a very troubling sign for the bulls.  It is waiving a red flag that investor sentiment is becoming very bullish. 

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Eric King

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rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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