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Sentiment has reached very high levels as the stock rally has approached all-time highs, but Mark Hulbert warns the would-be contrarian against selling off needlessly.

My guest today is Mark Hulbert and we are talking about investor sentiment. Hi Mark, and thanks for joining me.

It has been my pleasure.

So we've had a pretty good run in the market over the last year, and especially in the last six weeks or so. What is the investor sentiment now? Are they starting to get bearish or not?

No, the contrary. They are as bullish as they have been in years. In fact, we measure sentiment very carefully, and one of our measures is actually showing more bullish now than in almost a decade.

Wait, I've got to call my broker and sell.

Well, it turns out that there have been cases where they have been nearly this bullish and the market has run up for several more weeks, so it is not pinpoint accuracy here. We are not talking about going out and selling, as much as we would like to catch the exact day of the top, but it does suggest that risk in the market is at a relatively high point right now.

Now, when you measure the sentiment, do you measure it in certain sectors at all? Do you do anything like that to kind of get an idea on where people are most bullish?

The only sector we look at, in addition to looking at broad market sentiment, is the Nasdaq market. In the Nasdaq market in particular, we are seeing even more bullish right now. Since the Nasdaq market does tend to reflect retail sentiment among individual investors more than perhaps the bond market does, it is another indication of just how frothy this market is getting.

Interesting. Do you attribute that somewhat to the types of companies that are in the Nasdaq? I mean, it is not really just a technology index anymore.

Right, it is not, though I think at least it has the reputation of being the newer companies...even though Facebook (FB), for example, is now listed, most of the new companies, the most exciting, the ones that usually capture everyone's attention-the New York Stock Exchange will kill me for saying that, of course-but at least the association is that's on the Nasdaq market.

You know, you also mentioned something interesting about how the markets had a great run over the last year. I think it has been a textbook case of contrarian analysis at work. A year ago, there was an incredible amount of bearishness and skepticism, as we recall. Think of all the problems that we had on our radar screen then, whether it was Europe, whether it was the fiscal issues in this country,

One of the things I like to tell my clients is have things really changed that much over the last 12 months? The answer, I think, is more that our perception has changed. We still have just as much of a fiscal budget problem in Washington as we ever did. I don't see how Europe has ever really solved its problems, but now it looks like everyone has stopped worrying about it. I think may be it is just journalists have stopped writing about it because they are sick and tired of writing about it.

The market, they say, likes to climb a wall of worry, and there was a heck of a wall of worry a year ago. Now that wall of worry has been replaced by what they call a slope of hope...and that slope is probably one that, at least I bet, the market will descend.

What would you say to the individual investor? Certainly not run for the exits, but what kind of caution would you guide them with?

Now, I have to say, I am not an advisor. But the things you might want to do-these are standard things, nothing particularly earth-shattering about them-you might put stops relatively close to where the market is, so as the market goes up, you raise your stops so that you can guarantee and lock in much of your gains up to this point.

You can start reducing the underlying risk of your portfolio. For example, you can replace some of your more speculative positions with more conservative positions. That may be a good idea anyway, but especially now if you think risk in the market is high. You might want to target your underlying risk level of your portfolio to be reduced.

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Tickers Mentioned: FB

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