S&P 500: Over-valued?

Warren Buffet has always said, "Be fearful when others are greedy, and be greedy when others are fearful." That statement could not have been better applied to anything but the overall market and the S&P 500 today. The S&P 500 has skyrocketed 14.42% YTD, and bullish sentiment does not seem to be weakening. This appears to be very worrisome. The 50+ year average return of the S&P 500 anually is 11%. The S&P 500 has blown past that average in 24 days, not even a month!

Anytime you see a excessive bull run, the state of euphoric buying inevitably begins to fade, and the rally typically begins to turn south, and fast. I can see no real logical reason for the market to be behaving this way. There are simply still too many macro-economic issues that have not been solved (dollar falling in value, housing market falling still, unemployment still un-changed, etc.) for investors to have any rational reason to be so optimistic toward the equity markets.

Above is the S&P 500 charted. There are so many technical-analysis indicators pointing toward the index being very over-bought and due for a pullback, that I cannot fit them all on the chart. It suggests a bearish correction and soon. Here are some of the signs.

• The RSI indicator is about to break 70, which is a very over-bought signal.
• The Bollinger bands have contracted significantly, which means a major market trend is about to occur. Since the Index's candlesticks have been hugging the upper band, that points toward it being ready for a trend reversal from bullish to bearish.
• The MFI shows that a much more than usual amount of capital has been dumped into the equities markets, which is a over-bought signal.
• The final nail in the coffin is the fact the MACD has fallen below the signal line, giving off a bearish signal.

So what does this all mean? All major technical indicators point toward a bearish trend reversal in the S&P 500. This recent bear market rally is due to bust. This recent bull run in the S&P is simply a behavioral reaction due to the herd mentality, affecting Wall Street traders/managers and investors right now. I expect that a correction will occur in two to three weeks.

Ways to hedge against a correction?

• Purchase Ultra-Short ETFS.
• Purchase energy/commodity ETFS, or contracts.
• Purchase put options on the major index funds.
• Move capital to a money market mutual fund, and wait to see where to re-allocate funds.

Gains of this speed historically lead to one conclusion. A painful forced awareness, in a price correction of over-bought assets. All the technical, fundamental, and macro indicators point toward this being an irrational false rally. Hopefully, the correction won't lead to a blood-in-the-streets sell-off on Wall Street. It's always possible that I could be wrong, but evidence and due-diligence suggests otherwise.