CPCE Put/Call Ratio Weekly Chart Explodes Higher with Fear

The bulls went from uber complacency to fear and panic in a heartbeat. The markets continue to behave atypically. The Fed and other central banker easy money has destroyed all price discovery in markets creating wild moves. Stocks peaked out in the first half of 2011 creating a significant top at 1350-ish for the SPX followed by a drop to 1080, -20%. Of course the August 2011 waterfall crash was part of that bearish move.

Traders jump from uber complacency at 0.38 intraweek (red dot) to over 1.00 in about 4 to 6 weeks time). The current move is more compressed than in 2011 on a time basis. Drilling down further, let's follow the fractal from 2011 to see if it provides insight into the path ahead. The recent market top was an easy call to make as seen here over the last couple months with the negative divergence highlighted in charts, the rising wedges, the SPXA150R near 90, the uber low put/calls, low VIX and other factors all said the top was in. Those that did not exit long positions knowing the top was very near may already be down -4% or -5% or more thus far. Aunt Ethel and Uncle Frank took their entire life savings and invested it into dividend stocks, especially in utilities, just like the pundits on television told them to, but now are eating franks and beans for dinner seeing their retirement savings quickly evaporate and the benefits of a dividend looking trivial.

Keeping things simple, a relief rally is fully expected with fear and panic now in play. A 1.04 CPCE on Friday shows that traders threw the baby out with the bath water and several did jump out of windows; hopefully only first-floor windows. Back in June 2011, the stock market had taken the initial move down off the top (like now) from SPX 1360 to 1280, about 80 handles (the SPX is currently down about 65 points off the top and was down 75 points off the recent top intraday on Friday). The panic and fear level was the same as now, 1.04-1.10, which resulted in a relief rally back up from 1280 to 1350, about 70 handles, recovering most of the down move but not all. This price action printed the brown circle at 0.55-ish that marked another top at SPX 1350. The CPCE then wildly thrusts higher again to the purple circle above 1.00 again showing more panic and fear but this time it was warranted since the August 2011 waterfall crash just occurred. The SPX dropped from 1350 to 1080 in September. The 1080 market low corresponds to the panic above CPCE 1.00. This was a significant market bottom where the SPX recovered to 1300 again (at the green circle with CPCE 0.50-ish) then down to 1180 which was the bottom not to be seen again as the bulls mounted the strong over 2-year orgy upside party after that.

So correlating the fractal in the blue box to the present, the expectation is for the SPX to bounce to the 1950-1980 area, this move should correspond to the CPCE pulling back to about 0.55-ish, then a move down again, a much stronger move lower, perhaps as much as between 300 and 400 handles lower, 1550 to 1680, then a recover bounce. At that pint in time most long traders will be in a fox hole with pit helmets on and the CPCE back above 1.00 again.

So it was far easier to call the market top over the last month than the path ahead. It gets trickier now that panic and fear has returned. A bottom is expected in equities now, probably on Monday, or Tuesday, then the recovery move which should be an exceptional short-the-rally move. The move up may be strong and dramatic as bullish dip-buyers rush into the market but that will simply create the stronger move down as they are whipsawed in a quick reversal downward that may mimic the August 2011 waterfall crash. For now, the bulls should stage a come back and create calmer waters, however, it is likely the calm before the big storm. Nimble traders can play the rally bounce and should keep an eye on that 0.55-ish number above that may indicate the next market top as a recovery move occurs.

Comically, the media said there was no complacency in markets when there was as evidenced by the initial move down off the market top over the last month, and now, as the CPCE above indicates, fear and panic has returned; but the media now says the market sell off occurs last week without any sign of panic. You cannot make this stuff up. 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.

Note Added 8/5/14 at 3:04 AM: The CPCE drops to 0.63 as a recovery rally occurs in Monday trading, 8/4/14. Pay attention to the 0.55-ish level as discussed above for the fractal from 2011.