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Extreme bullishness is noteworthy. (see chart below of S&P 500 stocks above their 200-day moving average--a standard definition of a stock in a bullish trend.) Not only is the number of S&P 500 stocks that aren't in a bullish uptrend essentially signal noise, this extreme reading has been pegged to the upper boundary for weeks, far longer than the extremes reached in previous manias.

As my old quant boss Stew Pillette would observe when all the good news is out and has already been priced into the market, the next bit of news is likely to be bad and not priced in.

There are seven factors to keep in mind that may intensify reversals and risks:

One factor to keep in mind is the dominance of ETFs (exchange-traded funds) and index funds. As money pours into these passive funds, the funds buy whatever stocks are in the ETF or index. Good, bad and indifferent stocks in each ETF or index are purchased without any assessment of their relative value.

When owners sell, the process is reversed: every stock in the ETF or index is automatically sold to fund the redemption. This leads to "the baby being thrown out with the bathwater" as the best performing companies get sold off with the dregs in the ETF or index.

Another factor to keep in mind is the reliance of bubbles on borrowed money (margin debt) and leverage: 2X and 3X leveraged ETFs and a variety of financialization tricks to increase leverage and thus gains. When assets that have been leveraged reverse even modestly, the losses are quickly consequential, and the "solution" is to liquidate every leveraged asset before the position is wiped out. Selling begets selling, and this is the self-reinforcing feedback of crashes.

A third factor to keep in mind is the decline of short interest to all-time lows. Put another way, the number of speculators who have an incentive to buy shares in a decline is near all-time lows, so the only buyers in a real decline will be "buy the dip" players who will soon be wiped out if the decline continues.

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Disclosures: None.

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