Current stock market is in a complacency environment, market participants are in buying panic mode and the markets are in the ‘bad news is good news’ mode

With a general lack of major earnings or economic releases to drive the day's action, stocks settled almost completely flat today. The S&P 500 Index adding on just 0.2 point, closed at 1165.3.

Friday’s employment report showed the U.S. economy creating fewer private-sector jobs in September than anticipated, Wall Street climbed on the belief that the data raise the chances of the Fed buying more debt.

I think market participants are in the buying panic mode and the markets are in the ‘bad news is good news’ mode, meaning that the poor employment report of Friday, showing private-sector job gains remain very weak, would increase the likelihood that the Fed would continue injecting money into the financial system. Traders are afraid to miss the chance of the next bull market rally, or at least the year end rally, so they keep buying this overbought market.

In the meantime, most of the market participants are very optimistic, they think we’re not going to have a double dip, but slow growth. And with interest rates so low, equities is one of the few places to generate returns. Personally, this scenario is pretty scary and it make me worry and nervous. It looks to me that the current stock market is in a complacency environment.

If you look at the big picture, the secular bear market is still with us, and history tell us that in a bear market investors should sell on rallies in extreme complacency. I am not sure if we are exactly at the 'extreme complacency' zone, and frankly speaking, there is no one can pinpoint the exact point of extreme complacency. Therefore I highly suggest you to lighten your stocks holding now and on the way up of this rally to get ready for next down leg when all the bull cheerleaders retired.

The best bet is that the S&P 500 index drops around 30%, to the 800-range it hit in March of 2009. Then, the PE slipped below 14, and yields were almost 4%. For the first time in almost two decades, stocks became a bargain, and that's what it will take to make them a bargain again.