At times when no one wants to hear about panic, it behooves us all to remember the Titanic.

“Shut up, shut up, I am busy; I am working,” was the Titanic radio operator’s response to an iceberg warning received at 11:00 pm.

It was just about an hour later, around midnight on April 15th, 1912, when the Titanic was punctured several times by an iceberg. The unsinkable did the unthinkable and sunk.

Even though the Titanic's crew was aware of iceberg-laden waters, the ship was heading full-steam for a destination it would never reach. Making good time, fame and fortune were more important than safety.

Iceberg-infested waters

Today, investors find themselves in an environment that is infested with symbolic icebergs. The few remaining bears and independent thinkers are now told: “Shut up, shut up, I am busy making money.”

Unbelievable as it was, most of the 2,223 passengers and crew on board  the Titanic never got a chance to get off the boat.

Many invested in stocks (NYSEArca: VTI) today, may not get a chance to get out in time. This sounds impossible now, but a look at the human psyche shows that exactly is the case. Let’s examine how most investors dig their own grave.

Buy high – sell low

Of course all is well when stocks are up. Once the market is down, investors initially believe that falling prices are just a brief glitch to be eclipsed by the next rally. The events of 2007 – 2009 showed us that the next rally may not come.

Even once stocks rally, many get greedy and hope for even higher prices. Instead, the market reverses and drops to even lower lows.

At a certain point, investors start to get scared and pledge to get out as soon as they get the next rally. The rally never comes and your portfolio balance keeps sinking lower and lower.

Before you know, you’ve held a losing portfolio from Dow 14,000 to 7,000. Finally you sell at 7,000 because you’re fed up. To add insult to injury, the market recovered as soon as you sold. In fact, you believe the market recovered because you sold.

Statistics show that’s exactly what happened to a large number of investors in the post-2007 downturn. The ETF Profit Strategy Newsletter is designed to prevent such herding mentality investing errors. In fact, it recommended to sell in 2008 before the financial (NYSEArca: XLF) system became unglued and recommended to start loading up on ETFs on March 2, 2009.

Ironically, more investors are willing to buy at Dow 11,000 than Dow 7,000.

To avoid being dragged along by the market, the ETF Profit Strategy Newsletter provides monthly and weekly safety or stop-loss levels that confirm the market’s direction. Once a safety level is broken, chances are stocks will continue heading in that direction.

Fundamentally weak

According to a survey conducted by the National Federation of Independent Business (NFIB), smaller companies aren’t much more optimistic today than they were in the depths of the recession.

That pessimism is slowing job creation and likely weakening the economy, economists say. Unlike large companies (NYSEArca: IWB), small companies (NYSEArca: IWC) don’t get free access to low-interest loans.

Small businesses account for about half of the gross domestic product (GDP). Firms with fewer than 50 employees historically have created about one-third of jobs.

The ripple effect from the worst job market since the Great Depression are felt all across the economy, particularly in the real estate (NYSEArca: RWR) market. U.S. loan delinquencies stood at 10.2% at the end of February and non-current loans were at 13.5%. This is a 21% year-over-year increase.

More than 1.1 million loans that were still current in January were at least 30 days past due by the end of February. The government-backed “Hope Now” loan-modification program reported only 148,000 modifications. Hope Now estimates there are 4 million loans in default.

Fundamentally weak across the ocean

One of the ETF Profit Strategy Newsletters predictions for 2010 was that “sovereign debt defaults will raise its ugly head.”  Now, Greece’s debt problem has spiraled to $145 billion. Wasn’t it just $60 billion a few weeks ago? At $60 billion, there was no help for Greece to be found. It seems like at $145 billion, European countries took the bait. Yesterday it was Dubai, today it’s Greece, and contenders for tomorrow are already lining up.

Things are heating up

Despite all the iceberg warnings, the stock market is plowing ahead. The 1-year, 75% gain of the S&P 500 (SNP: ^GSPC), Dow Jones (DJI: ^DJI) and Nasdaq (Nasdaq: ^IXIC) is unprecedented in history.

Even more noteworthy is the fact that high-risk investments like junk bonds (NYSEArca: HYG) – or high yield bonds if you want to be politically correct – along with the financial (NYSEArca: VFH), real estate (NYSEArca: IYR), technology (NYSEArca: XLK), and homebuilders (NYSEArca: XHB) have roared back and more than doubled. Who are homebuilders building homes for?

Another sentiment measure we haven’t talked about in a while is the Hulbert Nasdaq Newsletter Sentiment Index (HNNSI), which represents the average recommended stock market exposure among Nasdaq (Nasdaq: QQQQ) market timers.

The HNNSI’s latest level is 80%. To put this in perspective, just three months ago, the HNNSI was at -16.1%. In other words, the HNNSI moved 96 percentage points in 75 days. The last time the HNNSI was higher than today as in 2000. At that time, the internet (NYSEArca: FDN) bubble came unglued.

No less than five other sentiment measures have reached levels not seen since 2007, 2000, or 1987. Guess what those years have in common?

Momentum may continue to drive prices higher as it did over the past months. But the fact that three of the past eight trading days showed the biggest one-day declines since mid-February suggests that the nature of this rally is changing. Last week saw the VIX just over 30% on Tuesday and over 20% on Friday.

The stock market is severely overvalued (based on actual earnings, not projected earnings) and sentiment indicators have reached levels not seen since 2007 or 2000. When this market busts, it may blow out more than just a piston or two. The more icebergs there are, the higher the chance of a shipwreck.

Monday’s update for the ETF Profit Strategy Newsletter includes a detailed technical forecast for the month, week and days ahead along with specific support, resistance and trigger levels. Once a trigger level is reached, the market is likely to continue moving in that direction towards the next support/resistance level and eventually the ultimate target.

How will you react to the “iceberg warning?”