Wednesday, November 19, 2014

CPCE Put/Call Ratio and SPX Daily Charts Significant Market Top At Hand

The bears have been slapped around for the last month as the SPX catapults over 200 handles purely fueled by the central banker orgy. The Fed, BOJ, PBOC, BOE and ECB collude to create the never-ending upside in equities. The stock market was teetering on collapse and headed down the rabbit hole in October so the Fed had no choice but to send Bullard out to announce that quantitative easing will remain on the table as a possibility; QE 4. The announcement turned the end of QE Infinity into a farce since QE clearly remains in play.

The double red circles show the significant tops and bottoms in equities over the last few months. The low CPCE in June signaled a significant top coming but it took another month for equities to top out. Typically, the time lag is not that long. The central bank goosing, however, distorts many market technicals and fundamentals these days. The CPCE called the August bottom within one week's time. Then, again, in August, the low CPCE took one month to play out creating the September top, another surprise that it took that long. The mid-October bottom was dead-on with the spike in CPCE showing that traders had become far too negative.

A high CPCE indicates traders that are worried so they are buying more puts than calls. The low CPCE signals complacency and lack of fear that markets will sell off and traders tripping over each other buying calls with reckless abandon; like now. The CPCE is a contrarian indicator so if traders are uber pessimistic, like mid-October, markets will actually bottom and rally while if traders are uber optimistic and worry-free, like now, markets will actually top out and sell off.

The CPCE prints a low 0.50 about three weeks ago as November began so the case can be made that the current low 0.47 print should forecast a market top within the next week and the top would likely be significant like the prior two tops. The SPX lost 80 points in the Aug-Sept selloff and 200 handles in the Sept-Oct selloff.

The projection is that the stock market should top out in the days ahead. This will throw a wrench into the works for the universal consensus that expects higher markets into year end. Using the one-month right translation for the prior tops described above, the longest case would be for the top to occur by mid-December but with the early November low CPCE above we are likely closer to the top than that and the top will likely occur before November ends. Exercise caution if long. Ditching the long side and bringing on shorts is a prudent strategy going forward. 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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