State of the Market Address:
- The Dow has been stuck in a 300 point trading range (19,999-19,700) since about December 12th of 2016. Either distributing at the top or consolidating.
- Shiller’s Adjusted S&P P/E ratio is at 28.25. Arguably the second highest level in history (if we adjust for 2000 distortions) and right behind 1929 top at 29.55.
- Weekly RSI at 69.14 Remains at overbough levels. Daily RSI is at 59.24 – neutral.
- Prior years corrections terminated at around 200 day moving average. Located at around 17,000 today (on weekly).
- Short-term MACD is beginning to roll over – weekly.
- Weekly stochastics remain at 93 and slowly declining. Extremely overbought level associated with prior market peaks. Daily at 52.43 – no longer oversold – neutral.
- Last weeks CTO Reports suggest that commercials (smart money) are shifting their positioning to net short. For instance, the Dow is 5X, the S&P is at 2X and the Nasdaq is at 4X short. That is a significant short position against the market.
- Demand for VIX has spiked. Two weeks ago investors have purchased 250,000 VIX call options with a strike price at 21, and another 100,000 with the strike at 22. Commercial VIX position is at 5X long.
In summary: For the time being the market remains in a clear bull trend. Yet, a number of longer-term indicators suggest the market might experience a substantial correction ahead. The market remains at extreme valuation levels and severely overbought on weekly charts. Plus, the “smart money” is positioning for some sort of a sell-off. Short-term, the market has resolved its severely overbought conditions. Suggesting that either a bounce or another push higher might be in the cards. A complex setup.
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