With S&P up 9% in July, it is time to sell

We kicked off the month of July with a brand new bear market. On June 30, the monthly chart of the S&P 500 closed below its 20-month exponential moving average (EMA) – which signals a bear market and tells investors it's time to sell. At the time, however, I cautioned stocks were wickedly oversold. The market usually bounces hard at the beginning of a bear market. So I figured we'd have a better selling opportunity in a month or so. Well, it hasn't quite been a month, but now it's time to sell. The S&P 500 is up 9% in July. Investor sentiment, which was bordering on fatalistic, is now bullish. The Volatility Index – a measure of fear in the marketplace – is at its lowest level in three months. And the percentage of stocks trading above their 50-day moving average has rocketed from a low of 6% at the end of June to 74% yesterday. We're not oversold anymore. In fact, we're overbought. If you were thinking about selling at the end of June but held off in hopes of getting a bounce, you now have that bounce. Holding on any further is risky business. Take a look at this updated monthly chart of the S&P 500 plotted against its 20-month EMA...

The red circles indicate bear-market signals. In the previous two examples, you can see how the S&P 500 rallied back to test the 20-month EMA from below before suffering a serious decline. The rally we've experienced so far in July has actually pushed the S&P 500 back above the line. Keep in mind, though, this is a monthly chart. All that matters is how the S&P looks at the end of the month.

If the S&P closes Friday above the line, the bear-market signal is canceled and we're back in bull mode. That sort of whipsaw action, however, is rare on a monthly chart. We haven't seen a false signal on this chart since 1990. It seems more likely stocks will fall over the next few days and the S&P 500 will finish out the month below 1,085, and below the 20-month EMA. That'll keep the bear-market signal alive and open up the possibility of a significant decline in August and September. In other words, the S&P 500 could drop 25 points in the next few days. And that decline could presage a huge drop this fall. Now looks like a pretty good time to sell. Best regards and good trading.