Traders were ducking champagne corks on Wall Street yesterday. The S&P 500 closed in the green for the first time this year. Stocks have erased the 26% loss suffered during the first 10 weeks of 2009 and are now up 0.6%.

Yippee. Let the celebration begin.

Sadly, I left the party a couple weeks ago, when the S&P crossed over 855. Worse yet, I started slowly building short positions. So while everybody else was letting the good times roll, I was feeling a bit like a nun strolling through a brothel.

It is difficult to be cautious as stock prices race to the sky. After all, no one wants to be the lone teetotaler at a fraternity kegger party. But traders should worry about the aftermath.

The best parties are often followed by the worst hangovers. The trick, of course, is to leave before everyone strips naked and jumps into the pool.

We’re nearing that point.

Wall Street is ignoring them, but there are plenty of warning signs. For example, two weeks ago, I shared with you a chart of the Nasdaq Summation Index, which was perilously close to a sell signal. I also told you the story of Fran the Taco man, who had a horrible track record of investing and had just turned bullish.

Insiders are selling stock at the fastest pace in two years. The CBOE put/call index – a freakishly accurate contrary indicator – is now at a frighteningly low level. And as you can tell from the following chart, 91% of the stocks in the S&P 500 are now trading above their 50-day moving averages…

Previous readings this high have preceded brutally sharp selloffs.

Stocks are overbought right now. That’s clear. And there are times where extremely overbought markets get even more extreme. It looks like we’re now in one of those times. So the market can still work its way higher.

Buying into these conditions, however, is rarely a smart move. The risk/reward weathervane is blowing strongly in the direction of risk. In fact, we’re rapidly approaching the best short-selling opportunity of the year.

So while everyone else is dancing with lampshades on their heads and celebrating the 0.6% gain in stocks this year, smart traders are preparing for the next big move.

It’ll be to the downside.

Best regards and good trading,

Jeff Clark
Growth Stock Wire