It’s all starting to feel like very familiar territory now…

Nothing financially bad can ever happen again. The stock market feels nice and cozy. People continue to make money. What’s not to like when the price of assets can only go in one direction?

This is what it felt like in March 2000 before the dot-coms turned south. It was what it felt like in October 2007 before the S&P rolled over.

And that’s what has me a bit concerned. The caution signs are starting to pile up.

No Fear Here

The Bloomberg headline said it all: “Retail Investors Just Made a Historic Move Into U.S. Stocks.”

TD Ameritrade’s proprietary measure of investor sentiment, culled from analysis of trading activity and customers’ accounts, hit an all-time high — the “largest single-month increase ever” — and the brokerage’s chief market strategist took note with this understatement: “The retail investor has become a bit more of a believer.”

Another sign popped up on CNBC a few weeks ago with the headline “No Fear Here.” An E-Trade survey of its customers hit a bullish extreme, with a record 71% of its high-net-worth individuals (those with $1 million or more in their accounts) expecting the fourth quarter to end higher than it started. Clearly the expectation among them is to continue to make money being long in the market.

What about the so-called “smart money”?

They’re taking money off the table and sounding the alarm:

• Bank of America Merrill Lynch said in a bearish warning note Wednesday: “Investors no longer fear risk but love it.”
• Carl Icahn stated a few days ago: “I really think even though earnings are going to be very good … I just think this thing has gotten into a euphoric state.”
• Goldman Sachs notes that valuations across nearly all market classes are at their highest in 117 years.

On top of all that, the stock market experienced something on December 4 I haven’t seen in many, many months — an old-fashioned “pop and drop” trading session.

The “pop” was at the start of the trading session. All the major indexes, like the S&P 500, opened sharply higher at new all-time intraday records.

The “drop” started 15 minutes after the opening bell, with a high-volume decline that persisted throughout the day, straight through to the end of the session.

(Source: TradingView.com)

The point is, it’s not a bad idea to take some proverbial money off the table in the least. Or if you have a contrarian streak, you can take the bearish side of the equation by purchasing a bear-leaning exchange-traded fund (ETF) like the ProShares Short S&P 500 ETF (NYSE: SH).

This trade hasn’t worked in a long time. But given the current extremes, it has a good chance to make money now, in my view.