A business man looking out of a glass elevator © Stella, fStop, Getty Images

I think every market moment should have a theme song that sums up its emotional tone.

Right now, as U.S. stocks sit at five-year or even all-time highs, and the Standard & Poor's 500 ($INX) tries to decide if it really, really wants to break above 1,500 and stay there, I think we need a ditty that captures the worry that market good fortune can bring. One that reminds us that at points like this, the biggest danger to the rally is that investors will scare themselves into a market retreat.

If we can remind ourselves of that tendency, and make it conscious, then maybe we can do something about it -- like try to figure out how much of the worry that we're feeling right now is a rational response to market conditions and how much is emotional baggage that we should shrug off. We also need to figure out what kind of strategy we can use to cope with the possibility of a market retreat on sentiment.

That is the subject of this column.

But let's begin with my choice for anthem for the moment: the Dan Hicks & the Hot Licks song "I Scare Myself."

The wail of worry

For those not familiar with the Dan Hicks oeuvre, "I Scare Myself" goes like this:

I scare myself
and I don't mean lightly
I scare myself
it can get frightenin'
I scare myself
to think what I could do
I scare myself
it's some kinda voodoo.

Why do those lyrics strike me as appropriate to the current market?

Jim Jubak

Jim Jubak

Because they speak to the traditional investors' dilemma in a rising market. We know we're supposed to let winners run (and cut our losses). But that advice is hard to follow, because we get nervous when the stocks we own rise. Our very good fortune makes us second-guess our good fortune. We can't help thinking that it's a good idea to get out before the market gods turn against us.

If it were just you and me having this random thought cross our minds, the best solution would be to find ourselves a good shrink. Maybe someone like Mel Brooks' Dr. Haldanish, who cured Bernice of her compulsion to tear paper by saying, "Bernice, don't tear paper." (Find the skit on Bing.) We'd do better as investors if we just got over our psychological problems.

But this isn't an individual psychological problem. It's a rising collective worry right now. And it's the collective nature of the worry that makes it a market force with the potential to move stocks. If you and I were the only investors or traders thinking about this, who'd care?

But you don't have to work to find evidence of the collective nature of this worry. In the past week or so, it has become a nagging voice that won't leave you alone.  

There are the stories about market complacency and more reminders that stocks are at a five-year or record high. You don't have to dig very deep to hit subtext here: Remember, these stories urge, the tops and crashes of 2000 and 2007.

There are the survey stories that report individual investors are moving back into stocks. Or that this or that class of professional "smart-money" investors has become increasingly bullish. The message here is pretty simple, if somewhat contradictory. Individual investors are "stupid money" that goes long stocks near a market top. Professional investors, on the other hand, aren't as smart as they think they are, and in their arrogance push strategies further than they were meant to go.

And finally there are the indicator stories -- more or less based on more or less historical data -- that discuss evidence that this market is nearing a top. An example is a piece by Mark Hulbert, the editor of Hulbert's Financial Digest, which cites a study by Ned Davis Research called "Leading Sectors for Calling Bull Market Peaks." The financial and utility sectors, the study notes, have tended to underperform in the months leading up to bull market peaks. The consumer discretionary and consumer staples, on the other hand, have tended to outperform. And, unfortunately, Hulbert notes, returns in the past three months for three of these four sectors are consistent with the formation of a top. (The performance of the financial sector doesn't fit the pattern, but, Hulbert notes, maybe that's because the Federal Reserve's actions have propped up the sector. Perhaps, I'd say. But then the Federal Reserve' actions have propped up the whole market.)

The last time the market showed this four-sector pattern was in May 2011. That ushered in what turned out to be a 20% correction from the spring high by the time it ended in October.

On the edge

It's easy to pooh-pooh these fears. After all, remember what has changed in the two weeks or so since we were cheering on the indexes as they recovered lost ground and appeared ready to make new highs. The U.S. debt ceiling battle is over for now. In Europe, Ireland and Portugal have moved closer to returning to the debt markets. The Bank of Japan is moving closer to a major new stimulus. And all the signs from China are pointing to slightly faster economic growth.

I don't much like the current stock market -- to me, it is too dependent on a flood of cash from global central banks and not enough backed by fundamental growth. At some point, I worry, the central banks will have to take away the punch bowl and the party will end. The only question, in my opinion, is how fast the economy is growing by the time the stimulus comes to an end -- and I fear it won't be growing very fast.

To me, these forces -- central bank cash and slowing economic growth -- are potential problems for the second half of the year. But right now, while I don't see any good fundamental reason for global stock markets to be rallying so strongly, I also don't see any event, forecast or report in the past week that says, "Hey, we've hit 1,500. Now it's time for a correction."

That doesn't mean, to my mind, however, that investors can simply ignore the possibility that we scare ourselves into a market retreat.