Investment Thesis

Frankly, I’m kind of worried.

Yes, it was a strong end to the year and the market has a lot of momentum.

And yes, the first two trading days of the year have been extremely positive historically, particularly in the last few years.

But with financial headlines screaming optimism after 2013’s surprisingly robust U.S. market, I have turned quite cautious about the next few weeks.

Investors are showing too much optimism for my taste. Mutual fund traders continue to pour money into stocks — and at an increasing pace. A wide range of sentiment extremes have soared ever higher, as more and more indicators suggest extreme confidence.

Bottom line?

If you are a student of market sentiment, as I am, the next two or three weeks look very treacherous for those chasing recent momentum.

So as Triple Digit Trader is a short-term trading service, I am recommending that you close a number of your current positions, as I detail below.

You will still have several positions in your Triple Digit Trader portfolio to profit from if the market continues to rally, including last week’s triple-leveraged recommendation on the Nasdaq-based ProShares UltraPro QQQ (TQQQ).

But for now, I recommend you buck the crowd, and pull in your horns.

Fundamentals

The U.S. economy is improving. Employment numbers are up. And President Obama has said 2014 will be the breakthrough year for the U.S. economy.

Conclusion? Watch out.

Technicals

Technically, many of your positions have become overbought on some of my favorite medium-term indicators like “slow stochastics.”

Market Tone

Many market sentiment indicators suggest the market is overbought and due for a correction.

Here is an example. Currently, the five-day average Total Put/Call Ratio is more than 20% from its six-month average, the 10-day is more than 15% away and the 21-day is more than 10%. The only other times in history all three ratios were this extended were 5/20/96, 7/15/97, 10/7/97, 11/27/98, 1/11/06 and 9/14/12.

Over the next two months, the average loss in the S&P 500 (-7.1%) was more than three times greater than the average gain (+2.3%).

The only real exception was 11/27/98.

Recommendations

  1. Sell your position in ING Bank (ING) to lock in a profit of 16.85%. Also sell the January $13.00 call options (ING140118C00013000) for a gain of 75%.
  2. Sell your positions in Japan by closing your holdings in the Direxion Daily Japan Bull 3X Shares (JPNL) for a quick 9.39% gain and the iShares MSCI Japan (EWJ) March 2014 call options (EWJ140322C00012000) for a 23.68% gain.
  3. Close your bet on the emerging markets rally by selling the ProShares Ultra MSCI Emerging Markets (EET) for a gain of 5.96%. Sell your related iShares MSCI Emerging Markets (EEM) $42.50 February call options (EEM140222C00042500) as well. If the market rallies a bit today, you should break even in these.
  4. Sell your position on Boeing (BA) for a gain of 2.15%. When you sell your February 2014 call options (BA140222C00135000), you should break roughly even.
  5. Sell two of your expiring option positions — the Santander (SAN) January 2014 $9.00 call options (SAN140118C00009000) and the Canadian Solar Inc. (CSIQ) January 2014 $31.00 call options (CSIQ140118C00031000) at a loss. Although I recommend you hold on to both of the underlying stock positions for now, I think we’ve just run out of time on these options set to expire on Jan. 18.

Latest Special Report

As a courtesy, I want to bring to your attention my latest special report, the newly updated version of The Top 12 Stocks You Should Buy Right Now, which features three of my top investment recommendations, as well as bonus picks from each of my fellow investment newsletter editors at Eagle.

Nicholas Vardy