For the first week this year, stocks take a breather…

Last week marks the first time this year that the key indices retreated, albeit modestly. The Dow Jones Industrial Average (chart) fell 0.47%, the S&P 500 (chart) -0.17%, the Nasdaq (chart) 0.06% and the Russell 2000 (chart) lost 2.14%. Still for the year these bellwether indexes are up sharply.

So why the pause? For the most part the pundits want you to believe that the Greek debt crisis is the reason. That in part may be true, but hardly anyone seems to be talking about how the markets appear to be a little exhausted and looks to be topping out? Let’s take a deeper look. One of the things I look for over and above the Relative Strength Index on stocks and indexes is market sentiment. There is extreme optimism in the markets right now with seemingly all of the headlines pointing to a bullish thesis. Also, there are a plethora of analysts coming out and raising their target prices on indexes and equities which can be construed as another indication of a topping pattern. Even BlackRock’s Larry Fink was recently quoted as saying “be 100% in stocks”.

Historically speaking, when you have the key indices and equities trading above the 70 and 80 value levels on the RSI, and you have market sentiment at extreme levels as we have today, a respectable pull back may be in the offing. Now if you add the continuing uncertainty of the European debt crisis to the mix, especially with Greece, this could cement the much anticipated retracement certain investors and traders have been looking for. Whatever the case is, it’s usually a good idea to lock in gains and make sure to use protective stops in your trading strategies.

Good luck to all 🙂