Recently, we got a 3% inflation reading, which was a touch below expectations. Markets responded about as you might expect. But I think the tomb is sealed, and we don’t even realize it yet, asserts Jared Dillian, editor of The 10th Man.

Bottoms are made on panic. Tops are made on euphoria. In October, we were fearing hyperinflation. Now there is open discussion about deflation.

The truth is always somewhere in between.

I’ll get to the point: I think that stocks have peaked in the near term, and I think that we could have a correction of 10%–12%. That may not sound like much, but it will come as a surprise to a lot of people, and things will get pretty bumpy.

We went from believing that inflation was undefeated to defeated in nine months. Over that time, the stock market has rallied over 20%. There is a lot of complacency out there. It’s the summer, people are having a good time, and they don’t see the need to hedge. People aren’t doing a lot of thinking about how to insure against a downturn.

Mind you, I’m not talking about a crash—I would never call for a crash—I’m just saying that a sharp correction is highly likely, and it is going to catch a lot of people offside.

Market sentiment is heating up. One of the things about sentiment trading is stepping outside yourself to think objectively about sentiment—including your own sentiment.

In October of last year, I was not that happy. I was overworked, not getting any exercise, and I was staring down the barrel of paying for this new palace of a house while the value of my portfolio was down about 10%. I stepped outside myself, examined my own sentiment, and observed sentiment in others.

There are indicators. You can look up the AAII numbers, and you will see that we’re in bullish sentiment territory. You can see the retail flows that are going into the market. Retail is always the last to know.

Now, I don’t think we come anywhere near putting in new lows, as the lows in October were a generational sentiment bottom. You had people predicting not just a crash in stocks but nuclear war and other horrible things. It was nuts. I think we will get down to about 4,000 in the S&P 500. And if we don’t, great!

And if you don’t believe me, then at least do some prudent risk management—go through your portfolio and figure out what you really need and what you really don’t need. Maybe think about a hedge. Maybe think about building the cash position.

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