Saturday, May 28, 2016
CPCE Put/Call Ratio and SPX S&P 500 Weekly Charts Signal Significant Market Top Near
The red circles show significant stock market tops over the last two years while the green circles show significant market bottoms. What do you think will happen on this weekly basis?
Traders have not been this complacent, fearless, and relaxed about the stock market for 18 months; not since the market top in late 2014. Everybody and his brother are going long the market. The taxi cab driver, door man and even the guy who sells newspapers and magazines on the corner all went long the market. Aunt Nellie, who is typically frugal, took her entire life savings and went long the spiders (SPY). Bullish traders high-five each other believing that the central bankers will support markets forever; after all, they have for seven years so why not another seven? Of course, when complacency rules the day, long traders are smacked in the face and brought down to earth off of their euphoric clouds.
Looking at the prior market tops, assessing the CPCE, two occur with a single spike lower and four occur with two or three low prints. Friday's end-of-week print just occurred so this is one spike lower (there may be a second spike low in a week or three). For all the tops, the CPCE prints the low either coincidentally with the stock market top or, say, within one month. This hints that June, perhaps early June, or maybe as the FOMC rate decision occurs on 6/15/16 and/or the Brexit referendum on 6/23/16, the top may form or may already have formed in the stock market. A Bradley turn date is on 6/1/16 so markets are agreeable to a trend change.
Looking at the SPX for each pull back that was forecasted by the CPCE, the S&P selloffs are 60 points, 130 points, 100, 215, 240 and 40. The average is 131 points. Throwing out the smallest loss and largest loss is an average loss of 126 points. The smallest loss is 40 points which is the last pull back so it may be unlikely that this mild move occurs again. The largest pull back is about 240 points for the crash from late last year into early this year down to the mid-February bottom.
If you made profits during the three-month rally, take your winnings and go home. You can scale out in stages if you are afraid of missing any additional shorter term upside say now into mid-June. At the same time, shorts can be brought on against the indexes in the same method, scaling in over the next three weeks.
The CPCE uber 18-month low, also verified by the low VIX, indicates rampant market complacency and lack of worry or fear and the expectation is that a significant market top forms over the coming days and couple-three weeks (June). The pull back in the SPX should be from 50 to 250 points, say about 100 points as a target for starters which would be the 2000-ish area for the SPX. The prior pullbacks occur over a 1 to 3-month period typically thus, say, around Labor Day, August/September, it would not be surprising to see the SPX sub 2000. 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.