Volume in VIX puts was more than two times that of calls on Friday. That's one of the highest turnovers in 15 years. It has typically spiked at times of extreme anxiety.
The markets closed another week at record highs, with the S&P 500 up by 2.3%, the Nasdaq by 3%, and the Dow by 2%. [...] I want to share two charts that caught my attention: The first chart, courtesy of Sentimentrader, depicts the small speculator index at the bottom. The annotation succinctly captures the essence of the chart— "small speculators are all in."
Small speculators are all-in.
This mirrors my observation last week regarding fund managers being fully invested based on the NAAIM index. The alignment between market participants, both large and small, underscores the pervasive euphoria across the market.
Tech leadership vs S&P 500 is at highs exceeding the Great Financial Crisis.
The second chart, from Bank of America Global Research, highlights the Technology leadership versus the S&P 500, reaching levels surpassing those seen before the Great Financial Crisis. This serves as an intriguing backdrop to maintain awareness as sentiment and positioning continue to stretch.
The S&P 500 stands as the final major index to surpass its all-time highs. The remaining horizontal line linked to price history is at 4818—the intraday all-time high recorded two years ago on January 4, 2022. Currently, the S&P 500 maintains robust health. In the chart’s lower panel is my preferred gauge of market breadth, Net New Highs. This metric reports the number of stocks reaching new highs versus those making new lows across the NYSE and Nasdaq markets. This measure of breadth has remains consistently positive during the best market rallies.
Given the prevailing positive sentiment across markets, stemming from the widespread advance since November, I speculate the likelihood of a healthy correction as the next probable move. To assess this, I will closely monitor market breadth, utilizing it as a key factor in evaluating the probabilities of whether the anticipated correction is likely to be healthy or potentially more severe.
A mere two
weeks ago, the S&P 500 ETF SPY experienced its largest inflow ever.
This encapsulates the current state of the S&P 500—a market
teetering on the brink of all-time highs, with both retail and
professional market participants joining with unwavering enthusiasm— the
metaphorical “everyone is in the pool” moment.
The leading observation for my initial 2024 thoughts that the market is ripe for a healthy correction is the condition of market sentiment, and equity exposure. For over a month now the CNN Fear & Greed Index has reported a market operating in greed, Extreme Greed for the last two weeks.
The NAAIM Exposure Index measures US equity exposure among active fund
managers reported the highest reading for the year, the highest since
November 2021. (The Nasdaq peaked in November 2021, and the S&P 500
just over a month later in January 2022).
The following chart of the S&P 500 marks the relative peaks
in sentiment and equity exposure using the CNN Fear & Greed Index
(marked by red arrows) and the NAAIM Exposure Index (marked by blue
arrows). It is a clear observation that the combination of excessive
greed and elevated equity exposure have preceded all meaningful declines
since the 2022 peak. I do not think it will be different this time.
To end last week’s note I summarized this chart as presenting a compelling argument for selling into greed— I still feel this way. Momentum
has propelled the market through the year, however this is recently
being subtly being interrupted. In the lower panel of the chart is the
Percentage Price Oscillator. This oscillator offers a quick insight into
trend momentum. The red dots within the panel signify negative
crossover events, a slowdown in momentum.
In
my analysis, momentum interruption occurs when the initial negative
crossover is not succeeded by a corrective price move. Instead, price
continues to climb with successive negative crossovers, creating a
pattern of interruptions. Based on my observations, the decline that follows such an interruption cycle tends to erase most of the earlier advance.
The previous instances of momentum interruptions in August 2021
and July 2022 exhibit an intriguing resemblance to the current
scenario, with the index rallying approximately 5% as momentum
decelerated. In both cases, the subsequent decline erased most of the
earlier advance. A comparable outcome today would potentially bring the index down to 4550. In
my analysis the immediate term has the signals flashing caution towards
a 5% decline. If this scenario unfolds, the speculated decline will
initially be favored as being one of health that sets the index up for
an additional leg higher. I speculate the correction will have the S&P 500 trade between 4500 - 4600 in the near term. Should this unfold, it will initially provide a healthy technical appearance where price revisits the breakout area.
On Friday, July 14th the CBOE Equity Put / Call Ratio closed at 0.53, signalling extreme greed. On Monday, July 17th the SPX performed a narrow range inside day (IDnr 4 and IDnr7), and closed forming a neutral doji candle. However, on July 17th the CBOE Equity Put/Call Ratio closed at 0.63, and the 3-Day Moving Average (blue line) is about to turn up (down on the inverted scale).
Jesse Felder (Jul 30, 2016 @ Zero Hedge) - Over the past half-century, we have never seen a decline in earnings of this magnitude without at least a 20% fall in stock prices, a hurdle many use to define a bear market. In other words, buying the new highs in the S&P 500 today means you believe “this time is different.” It could turn out that way but history shows that sort of thinking to be very dangerous to your financial well-being.
On July 29 CNN's Fear & Greed Index indicated "Extreme Greed" Source: CNN Fear & Greed Index
Citigroup's Panic/Euphoria Model on August 01, 2016 = Most 'euphoric' since August 2015. Source: Citigroup Panic/Euphoria Model
The VIX (CBOE volatility index) revisited the Oct 28, 2015 low at 12.8 and reversed to the upside, while the SPX formed a NR4, and a doji candle. June 8 (Wed) is 118 CD (4 Lunar Cycles) from the major low on Feb 11, 2016. The SoLunar Map points to a high on June 9 (Thu). There is a cluster of 3 potential Jack Gillen turn days from June 6 to 8. Since June 10 (Fri) is a Cosmic Cluster Day,the indices may keep chopping upinto Thursday or even Friday. Please note: The NYSE McClellan Oscillator and the the McClellan Ratio Adjusted NYSE Summation Index are still rising (HERE + HERE)
