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Investors have convinced themselves that the economy is getting better faster than they expected.

Unfortunately, that’s the kind of emotional feedback loop that gets investors and markets in trouble.

Know what the most important evidence these investors cite is right now that proves that the economy is getting better? No, it’s not car sales or survey data from purchasing managers or the new claims for unemployment.

It’s the stock market. Stocks sure wouldn’t be going up with no reason, right? So the fact that they’re going up is proof that the economy is getting better, right.

I don’t see the fundamentals–you know things like growing sales and rising consumer spending–that justify more than another 100 points on the Standard & Poor’s 500 stock index to, say, 1100. Anything move above that is running on vapor and emotion–and the desperate need of money managers who have missed this rally to catch up.

If stocks are up 50% when it comes time in November to report to your clients, do you want to try to explain why you’re 50% in cash, why you’ve lagged the rally, and why you got killed when the market dropped like a stone to the March 2009 lows?

I don’t think we need to immediately rush to the sidelines just yet. Money managers sitting in cash want to buy stocks. They need to buy stocks. They will buy stocks.

But I wouldn’t be loading up the truck here. Enjoy the gains in what you own. But don’t chase this rally at this point. I hope that you bought some of the four stocks that I added to the Jubak’s Picks portfolio in the last couple of weeks. Three of the four are up: Microsoft (MSFT) up 2.2%, Joy Global (JOYG) up 2.3%, and Qualcomm (QCOM) up 5.2% as of the close on August 3. Even the laggard Potash of Saskatchewan (POT) is down just 1% and is on its way, I think, to the black.

I’m not planning on adding anything here unless I see evidence that my take on the economy is wrong and that there really is fundamental improvement underway.

Instead I’m going to spend my time monitoring what I own and looking for signs that it’s getting dangerously over-extended. In other words, right here, while I’m not doing much of anything, my bias is on the sell side. 

We all know how high stocks can go on emotion, don’t we?