Simple as the concept of Howie Mandel’s “Deal or No Deal” may be, it provides a window into the souls of the contestants playing for the top price of $1 million. The tug of war between reward and safety highlights one of the most basic of emotions – greed.

On Wall Street, we call the contestants “investors.” Just as on the popular game show, investors have to consistently measure their risk and reward potential.

How often has the audience rooted for the contestant to decline the banker’s safe offer and to keep playing for the chance at a bigger price? More often than not, however, the final price is lower than the banker’s sure offer.

No doubt, investing is more serious than any game show. Still, the basics remain the same. The major indexes a la Dow Jones (DJI: ^DJI), S&P 500 (SNP: ^GSPC) and Nasdaq (Nasdaq: ^IXIC) have rallied more than 65% since their March lows. The general consensus is that more gains are on the horizon.

Investors are faced with the decision whether to keep gambling for even more gains, or accept the current offer – going to cash. Going to cash and locking in gains is definitely the less popular option, and the audience of “Deal or No Deal” would boo the play-it-safe call.

But neither the audiences nor Wall Street’s money is at stake. It’s your money, so making an educated decision will have a major impact on your financial future.

The stakes: Your financial future

It’s tough to emotionally detach yourself from your own money and financial future. But most often, taking a step back and evaluating the general investment environment is worth its time in gold. Just as a map or GPS can give you the perspective needed when lost, a thorough evaluation of what’s really going on will go a long way in determining your financial whereabouts.

Higher prices, why?

There’s a saying on Wall Street; “don’t fight the tape.” This piece of wisdom has been proven true over the past several months. The market’s trend has been up and every attempt by the bears to tug prices lower has been met by even more buying interest. The general trend for stocks is up.

Lower prices, why?

A look at the chart below shows that prices have been more or less stagnant for the past six weeks. Even though it appears that the indexes have moved up another 10-20% in the recent weeks; they haven’t. In fact, today the S&P 500 (NYSEArca: SPY) is at about the same level as it was in mid-October.

Many are under the impression that the stock market in general is improving. Is it really though?

The S&P’s belabored attempts to close above 1,110 have been accompanied by ever decreasing volume. Compared to the average volume since the beginning of March, the most recent 10-day average volume is anemic and has dropped 28%.

Thursday’s (12-3-09) new intraday 52-week high for the Dow Jones (NYSEArca: DIA) was confirmed by three Dow components. The remaining 27 were unable to climb to new highs. Small cap stocks (NYSEArca: IWM) and financial stocks (NYSEArca: XLF) continue to lag the market. An indication that investors’ appetite for risk is starting to dry up.

Purely common sense

Before we consider two more disturbing facts for the bulls, let’s approach this matter from a purely common-sense point of view.

Earlier this year in March, investors couldn’t get out of all asset classes fast enough. International stocks (NYSEArca: VT), emerging markets (NYSEArca: EEM), small cap stocks (NYSEArca: IJS), mid cap stocks (NYSEArca: MDY), large cap stocks (NYSEArca: VV), real estate, and commodities felt the wrath of the bear.

Aside from a select few, nobody wanted to own stocks when the Dow traded at 7,000 or below. Today at 10,000 and above, stocks are more popular than the Jonas Brothers.

Since when does it make sense to buy anything, stocks in particular, at a 50% premium? If history is any guide, at times like this it often pays to be a contrarian.

On March 2nd for example, the ETF Profit Strategy Newsletter sent out a Trend Change Alert which predicted the onset of the biggest rally since the October 2007 all-time highs. The rally certainly delivered, and investors willing to take a bet against the prevailing trend were rewarded with generous profits.

According to Investors Intelligence, only 26.4% of advisors and newsletter authors were bullish on the market, while nearly 50% were bearish and expected lower prices. The remaining ones were undecided with a bias towards being bearish.

Common sense investors know that the majority of “contestants” jump on a trend shortly before it exhausts itself and reverses. This has been dubbed jumping on the bandwagon – too late.

Look at what others are doing … and do the opposite

Contrarian investors are well aware that the amount of bullish advisors and investors reached record levels right before the Nasdaq (Nasdaq: QQQQ) took a quick stab at 5,000 and the tech-bubble (NYSEArca: XLK) burst, and again in the June – November 2007 time-frame, right before the most recent collapse started.

The opposite happened at the March lows. What would you expect to happen at the next market top? Bulls should rule the roost while bears should disappear.

This describes today. Optimistic sentiment has been on the rise, while the percentage of bearish advisors, as tracked be Investors Intelligence, has fallen to the lowest point since June 13, 2003. The chart below plots the prices of the S&P 500, since March 2009, against the percentage of bears. Keep in mind that even the 2007 market top saw more bearish sentiment that today.

Angels vs. demons

A look at the chart shows that since March, every correction was followed by a push to yet higher highs.

How can you be certain that this won’t be the case again? There is no absolute certainty. However, getting the odds right will make a huge difference.

Even though another minor advance is possible, the evidence in favor of the up-trend tiring continue to pile up. In prior articles, we discussed the record amount of selling climaxes (an indications that stocks are moving into weaker hands), lack of conviction, non-confirmations between the major indexes, and many others.

A tiring up-trend, however, does not automatically translate into a major collapse. What evidence is there that a major collapse is possible?

Aside from the obvious - unemployment, falling property prices, record foreclosures, and stagnant economic growth - the market itself provides obvious readings, just like a car’s temperature gauge indicates when the engine is overheating.

A matter of value

In general, a stock or a stock index is presumed to trade at fair value. Quite frequently, however, the fair value deviates from the true value. This condition can persist for quite a while, but always corrects eventually. So, the markets will sooner or later make sure everyone knows where the fair value is. We’ve seen this in the 1930s, 1940s, 1950s, 1970s, and 1980s.

Partially this was seen in 2000 and 2009. Why only partially? Historically, the market has to drop a certain amount before fair values are reached. How much is a “certain amount?” This can’t be gauged by a flat number of points or percentage, but rather by valuation metrics, such as P/E ratios and dividend yields.

When P/E ratios and dividend yields drop to their respective rock-bottom levels – which are indicative of a valuation reset to fair value – the market has fallen enough. At times, this takes a very significant decline in prices.

Earlier in March, when the Dow declined to 6,500, dividend yields and P/E ratios were still hovering way above the rock bottom levels. Today, P/E ratios are the highest they’ve ever been (according to Standard & Poor’s), while dividend yields are close to their lowest reading in decades – exactly the opposite of what you’d want to see.

The November issue of the ETF Profit Strategy Newsletter includes a detailed analysis of these indicators, which plots P/E ratios, dividend yields, mutual fund cash reserves, and the Dow measured in gold against the major indexes.

Due to their implications, we’ve dubbed those indicators the “Four Horsemen.” In other words, if asked “deal or no deal,” the answer, based on history, would clearly be “no deal.” For those who’ve never watched the show, it means “cash out.”