Fears of Market Bubble Prompt Investors to Seek Exit Strategy

Steve Hochberg, chief market analyst at Elliot Wave International, in an interview with CNBC Thursday called this year's stock surge a bear-market rally that is running out steam.

Market bears are echoing that sentiment, saying that most leading economic indicators, such as capacity utilization and the velocity of money coming into the market—the so-called "M1" measure—do not point towards recovery.

"This buying does not signal a lasting economic recovery. It signals a surge of speculation of the same type that created the real estate bubble and the Internet bubble," says Walter Zimmerman, chief technical analyst at international broker United-ICAP. "It's cheap money driving short-term traders.

"It's not based on a recovery in employment, it's not based on factories starting back up again. It's based on a Fed-created interest rate anomaly that's been the spawning ground for every major speculative bubble in the last 20 years."

Using a strictly technical view Zimmerman says "there's no chance" the March lows will hold and sees the Standard & Poor's 500 tumbling to the 550-590 range next year.

"Our advice is maybe you can make another few dollars to the upside but the downside risk is so severe that our advice has been either you get out of the stock market here or you pick a level ahead of time that if it breaks below you get out," he says. "Forget about investing for the next couple of years. Focus on safety of your principal, keeping your powder dry."

Some have already taken that position.

"I've already chickened out and raised cash," says Delta's Hanlon, who started buying stocks when investor Doug Kass called a market bottom in early March but is now in metals, foreign-currencies and other cash-based investments. "If I miss any more, I'm in the spot where I'm going to have to say, 'Oh well.' Cash is not a bad thing today."

For those still in the market, expect to see more short-term moves and conservative stop-loss measures.

"We remain constructive on the nascent recovery but skeptical about broad market valuations in both equities and in the commodities space...as central banks deploy exit strategies," John Stoltzfus, analyst for Ticonderoga Securities in New York, wrote in an analysis Thursday. "An increase in volatility should as usual bring both risks and opportunities for the quick and the steady. Traders, stock pickers and buyers on dips should benefit as things progress."

Buy-and-hold strategies also are likely to be tested going forward.

"It's not irrational to be a long-term investor now. It is irrational to take too much long-term risk," Creatura says. "This is no time to be a hero. Don't bet it all on red-7 at the roulette wheel."

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