02/18/2011 05:25 pm ET | Updated May 25, 2011

Too Many Bulls Could Gore Stocks

Rampant bullish fever is scaring a growing number of market watchers. No wonder. It's generally a prelude to a sizable market decline.

One UK money manager who was recently in the U.S., tells me he's deeply concerned by: the "overwhelming bullish sentiment" here -- both on the part of the pros and the public -- in the face of huge market gains in recent years (88 percent since March of 2009 and a tad above 20 percent since late August) and lots of question marks.

He's by no means alone in worrying about such lingering concerns as our huge national debt and budget deficit loads ($14.1 trillion and $1.3 trillion, respectively), growing weakness in housing, high unemployment and accelerating turmoil in the Middle East.

"There's too much bull fever, which invariably signals a falling market is on the way," the manager says.

Charles Biderman, the CEO of liquidity tracker TrimTabs Research, partially owned by Goldman Sachs, also hoists some warning flags and recently toned down his bullish stance to one of caution, citing a resumption of exuberant and frothy investor sentiment and an outburst of new calendar offerings ($10 billion last week alone in initial public offerings and secondary offerings). Further, in the last four weeks alone, he points out, retail investors poured $12.3 billion into U.S. stock mutual funds, which, from a contrarian perspective, he regards as an ominous development, given it's such a big inflow in such a short period by stock players with an awful track record. There's way too much complacency, Biderman says.

Adding to this exuberance, the American Association of Individual Investors reports that bullish sentiment the past week jumped 9.5 percent, to 51.5 percent, while the bearish sentiment fell 7.4 percent to 26.9 percent.

On top of this, more sunny sentiment, with Investors Intelligence reporting that 52.7% of investment advisers are bullish, way more than double the 22 percent who are bearish.

Yet another sign of bullish fever is the stepped-up inflows from sophisticated investors into hedge funds, which now boast $1.7 trillion in assets, the highest level since October of 2008. The latest inflow numbers, show an estimated $6.6 billion was invested in December, the sixth straight month of asset accumulation by hedge funds.

In contrast, which has to be a worrisome note, those corporate insiders (officers and directors of companies) have been dumping stocks like crazy. For example, insider sales exploded to $11.6 billion in November and to $14.8 billion in December, the highest level since 2007. Insiders unloaded another $4.9 billion in all of January and have already sold another $4.1 billion so far in February.

Interestingly, the ratio of insider selling to insider buying rose to 17.4, the highest level since November of 2009. This ratio has risen steadily since QE2 was announced last august. "That's an ominous portent of what we think would happen to stock prices if QE2 stops (it ends in June)," Biderman says.

What does it all mean? "The investment course is obvious," asserts Biderman. "It's time to take some profits off the table."

It all reminds me of a comment by American author Bill Vaughan, who wrote: "A February thaw is merely nature's way of warning us against over-optimism."

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