“Quit while you’re ahead” is probably one of the most commonly uttered - and most often ignored - pieces of advice given to gamblers, traders, and investors alike.

Well, it’s that time again. The S&P 500 (NYSEArca: SPY) has rallied more than 30% before giving up some of its gain. Is it time to take the recent profits and run, or should you stay put and expose your portfolio to the potential of more gains and the risk of lower prices?

A double-edged sword

Before addressing the market’s direction (short and long-term), I would like to point out a few sectors you should put on your watch list. Just like a house on the shore will be the first to suffer from huge swells, these sectors will be the first to crumble under further economic pressure.

This dynamic, however, works both ways. If the economy were to continue to improve, those three sectors would also be the first to rally even further. We consider them high octane sectors that validate special consideration and treatment.

After forecasting a market bottom between Dow (NYSEArca: DIA) 6,700 and Dow 6,000 early in 2009, the ETF Profit Strategy Newsletter sent out a Trend Change Alert on March 2nd, 2009, a few days before the market bottomed at Dow 6,440. The Trend Change Alert outlined ETF profit strategies for the conservative, moderate, and aggressive investor.

The biggest profits were projected to come from the financial and consumer discretionary sector. From the March lows to the May highs, the S&P 500 gained close to 40%. The Consumer Discretionary Select Sector SPDRs (NYSEArca: XLY) rose by nearly 50%, while the Financial Select Sector SPDRs (NYSEArca: XLF) shot up by more than 100%. High octane indeed!

Leveraged financial ETFs topped the list of best performers over the past few months. The 2x leveraged Ultra Financial ProShares (NYSEArca: UYG) and the 3x leveraged Direxion Daily Financial Bull 3x Shares (NYSEArca: FAS), jumped as much as 200% and 370%. In fact, the Trend Change Alert noted the following about UYG: “UYG could morph into one of the best performing ETFs over the next few months.”

After such a powerful push it is not out of the ordinary for sectors and their corresponding ETFs to take a breather. Such a breather relieves the overbought condition and allows momentum to cool down and refuel for another push to new recovery highs. Those recovery highs however, once reached, may not be broken or revisited for years to come (more about that later).

High octane sectors

For this reason, it makes sense to put high octane sector ETFs on a tight leash. The top priority watch list should include ETFs linked to the following sectors: Financials, real estate, and consumer discretionary.

Bad news is likely to surface from the banking and financial sector. Over the past two years, volatility has had a firm grip on financials. In a down market, volatility translates into higher and faster losses compared to the overall market. In addition to financial ETFs, keep an eye on banking and insurance ETFs such as the SPDR KBW Bank ETF (NYSEArca: KBE) and the SPDR KBW Insurance ETF (NYSEArca: KIE).

Toxic mortgages, the issues that triggered the bear market, have made real estate one of the worst performing sectors. An economic recovery can’t (and won’t) take place without rising real estate prices and consumers able to pay their mortgages. A small uptick in the real estate industry is simply not enough to stop the bleeding.

Don’t allow the 9.34% yield of the Vanguard REIT ETF (NYSEArca: VNQ), or the 50% spike in the SPDR S&P Homebuilders (NYSEArca: XHB) to cloud your judgment. Hundreds of billions of commercial mortgages are slated to reset over the next two years. Delinquencies and defaults are bound to hurt Real Estate Investment Trusts (REITs), such as the ones held inside the iShares Cohen & Steers Realty Major (NYSEArca: ICF).

It is said that 75% of the U.S. economy depends on consumer spending. Discretionary consumer spending has all but dried up. Discretionary spending includes optional purchases such as a new TV, new PlayStation, a computer upgrade, or a new car. For the first time in decades, American consumers are actually saving more and spending less.

Good for the consumer - bad for the economy

For the individual consumer, this kind of money management is the right thing to do. For the economy in general, and retailers in particular, this kind of behavior is like poison.

Since individual economic sectors are not decoupled from each other, even more complacent and defensive sectors, such as the Consumer Staples Select Sector SPDRs (NYSEArca: XLP) and Healthcare Select Sector SPDRs (NYSEArca: XLV), should not be ignored.

A long-term outlook

An understanding of whether the March lows will hold is imperative to any investment strategy. Even though the general consent reflects the “worst is behind us” spirit, an analysis of long-term indicators with a track record of accuracy says otherwise.

The short term picture is not quite as clear as the long-term outlook. Nevertheless, based on a composite of indicators, another down-up zigzag of some degree, concluded with new recovery highs, seems to be the most probable route over the next few weeks/months.

Beyond the summer, long-term indicators leave little doubt about the market’s direction. P/E ratios and dividend yields are discussed daily by financial analysts and the media. Unfortunately, their “crystal ball-like” analytic features remain largely ignored.

Students of history know that the stock market has never reached a major market bottom unless P/E ratios and dividend yields reach true rock-bottom levels. Just like ice doesn’t melt unless the thermometer moves above 32 degrees, the stock market does not bottom unless those trusted measures of value register certain readings.

The same holds true for mutual fund manager’s cash holdings. The current 5% cash level of equity mutual funds is far from the cash levels seen at prior market bottoms.

The above three indicators further confirm what a chart of the Dow Jones measured in real currency – gold (NYSEArca: GLD) – already revealed months ago.

The March and June issue of the ETF Profit Strategy Newsletter contained a detailed analysis of P/E ratios, dividend yields, cash reserves, and the Dow measured in gold. It also included target levels for the ultimate market bottom, and top of this counter trend rally. If you’ve been wondering if you should "quit while you’re ahead", look to these indicators for a strong clue.