Wednesday, March 5, 2014

CBOE SKEW Weekly Chart Signals Another Significant Market Top

The SKEW chart was last highlighted as January began which signaled the big January sell off. Type "skew' into the search box at the right to bring up that prior article. The skew is now at the highest levels in years. The SKEW helps ascertain the likelihood of a major negative market event occurring. A reading at 100 indicates that equity markets are performing in a relatively normal steady-eddy pattern with the chance of a black swan event completely off the radar. As the skew moves higher the likelihood of a drastic negative market event increases. Note that 130 and higher identifies significant market tops. The market bottoms are identified by the lower circles and occur under 115. The projection in early January was that something very negative was about to happen, and the sell off occurred. Kitty the cat remains very scared and refuses to come out from behind the desk and Fred the dog is hiding in the basement. The skew jumped back up to the 140-ish highs now setting up the same scenario as early January.

The Fed's QE2 ran out of gas moving into 2011 which created the market top at a SKEW of 130+ in summer 2011. The August 2011 crash followed. The markets print the other significant tops in the spring of 2012 (140 SKEW), then September 2012, then May 2013, January 2014, and  There is a euphoric bullishness abound in markets. Traders were outright giddy during yesterday's large Ukraine rally. This is the exact type of behavior you would expect at a significant market top. In addition, permabears have flipped over to the bull side throwing in the towel. There are no bears remaining. The low CPC and CPCE put/call ratios, and low VIX, also verify the rampant complacency in markets currently. The CPCE dropped back down to 0.48 yesterday verifying a complete lack of fear. Money managers are guaranteeing investors that equities will go up forever.

Traders continue drinking the holiday eggnog staggering around as happy drunkards hitting the buy button every 10 minutes without worry or fear. Keystone is calling for a significant market top in early 2014. The January selloff appeared to have legs but the debt ceiling resolution, Yellen friendliness and Ukraine rally all create a happy February recovery. Another top should be on tap now and markets may set up for a crash just like the prior large pull backs in Fall 2008 and August 2011. Every trader on Wall Street is on the long side of the boat, 'partying like its 1999' without a care in the world. It sure looks like fun with the party in full swing, the band plays on, the Fed's booze is flowing like water, the BOJ arrived and are drinking sake yelling "Banzai!" Long traders are now donning lamp shades dancing on table tops, drunk as skunks, now celebrating bad news as well as good news.

Assessing the pullbacks for the SPX as a result of the tops called by the SKEW, the sell offs were -280 SPX handles, -165 handles, -130 handles, -120 handles and January -110 handles. Thus, to project the coming correction, now at the door step, a move lower of -100 to -300 SPX handles is in play. The average drop is about -160 SPX handles with the worse drop during the August 2011 waterfall crash at -280 points and the mildest pull back was the -110 and -120 point pull backs in January 2014 and May-June 2013, respectively. Thus, let's just say the pending correction should be at least another -110, and perhaps around -150 to -300 handles which creates an SPX downside target of 1550-1750. The SPX 50-week MA is 1714. The SPX has not back kissed the 200-day MA at 1729, and rising, in over one-year's time; very uncharacteristic for markets. These two important moving averages create a lower target zone at 1700-1730 which lines up with the downside target from the SPX daily chart's expansion pattern.

The SKEW prints at 130 now coming off the uber high 140-ish level. What do you think is about to happen? Watch your wallet. This information is for educational and entertainment purposes only.  Do not invest based on anything you read or view here.  Consult your financial advisor before making any investment decision.

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