I first wrote of the VIX level of 20 as an important demarcation in the discussions of the VIX in 2009.  It continues to be an important level, serving both as technical support and resistance.  In addition, when one views the VIX compared to the stock market (S&P500) over the last few years, one might conclude that a VIX level under 20 signifies investor overconfidence and/or complacency, as the stock market has often reacted in a sharply negative manner after sustained VIX advances above the 20 level.

Below is a chart displaying the VIX, in red, on a LOG scale, 10-year daily basis through yesterday’s close of 17.76.  Below the VIX is the S&P500 :

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1344.66 as this post is written

While the full list is extensive, I believe the list below represents a “sample” of how there is a high level of “frothiness” and other excess in the markets, which is a dangerous condition.

The stock market, as well as other financial markets, have been on a “tear” since the October 4 low of 1074.77 on the S&P500.  This price action has been especially frenetic since the start of 2012.  This is illustrated in a 1-year daily chart of the stock market :

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

One item that stands out is the large spread between the VIX and VIX Futures. As of this morning, the VIX stood at 17.80, while the March VIX futures were at 20.55, the June VIX futures were at 25.10, and the August futures were at 26.50.  This spread is outsized and is one “red flag.”

I have in the past commented upon the VIX level of 20 as being significant in itself, and it continues to be an important demarcation.

Additionally, the SentimenTrader.com site had various statistics of note in the Friday evening comments of last week. As seen in that note, the list of extremes that were bearish (i.e. skewed too highly bullish) for the market was very extensive, with 31 listed.  This high imbalance of indicators has been persistent since roughly mid-December.

In the comments, I found these to be especially notable :

An index that looks at various methods of hedging shows that there is very little of it going on.  The Equity Hedging Index has dropped to one of the lowest levels in a decade.

also:

Commercial hedgers in stock index futures have gone net short several major indexes to nearly the largest degree in nine years.

also:

A surge in buying pressure today took the short-termIntraday Cumulative TICK for the Nasdaq to its 2nd-highest reading in 5 years.  The highest was +11800 on 10/27/11 (the Nasdaq corrected over the next few weeks).

Another measure that is highly extended is the percentage of NYSE stocks above their 50-day moving average (at 89.32 as of Friday’s close).

Other notable aspect includes the steep trajectory of the QQQ in 2012 (from the 2011 close of 55.83 to 61.93 currently), as well as the continuing trend of “hot” tech stock IPOs being launched at (at least) 10x revenues and very high earnings multiples.

While these extremes can persist and in some cases have persisted, for a while, they usually serve as a warning sign.  These excessive sentiment and worrisome technical analysis indicators constitute a subset of what I have written concerning the building level of financial danger.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1343.09 as this post is written

Strains in global financial markets continue to pose significant downside risks to the economic outlook.

-an excerpt from the FOMC Statement of January 25, 2012

On October 17 I wrote a post titled “Danger Signs In The Stock Market, Financial System And Economy.”  This post is a brief fifth update to that post.

My overall analysis indicates a continuing elevated and growing level of danger.

My views of this danger, and its implications regarding the financial markets and economy as a whole, were last discussed in the post of January 11, 2012, titled “Building Financial Danger – January 11, 2012 Update.”

In that post, I said :

…my analyses indicate that the danger inherent in the financial system has reached a level at which a stock market crash – that would also involve (as seen in 2008) various other markets as well – has reached a level at which a near-term crash is (at least) a significant concern.

Additionally, since that January 11 update, several new factors have been added to a rather long list of problematical fundamental, technical analysis, and other considerations.

Currently, the overall situation is somewhat reminiscent of the days leading to the “Flash Crash” of May 6, 2010.   I wrote of that situation on April 19, 2010, in “S&P500 at Extremes – Technically and Fundamentally.”  While now and then share certain similarities, my analysis indicates that our current economic and financial situation is of far greater peril.

As reference, below is a 1-year daily chart of the S&P500, indicating both the 50dma and 200dma:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1324.07 as this post is written

The following three charts illustrate various technical analysis aspects of the U.S. Dollar, as depicted by the U.S. Dollar Index.

First, a look at the monthly U.S. Dollar from 1983.  This clearly shows a long-term weakness, with the blue line showing technical support (until 2007):

(charts courtesy of StockCharts.com; annotations by the author)

(click on charts to enlarge images)

-

Next, another chart, this one focused on the daily U.S. Dollar since 2000 on a LOG scale.  The red line represents both a trendline as well as a relatively good visual “best-fit” line.  The gray dotted line is the 200-day M.A. (moving average).  As seen on this chart, the U.S. Dollar looks vulnerable to continuing its downward trend that has been interrupted since early 2008:

-

Lastly, a chart of the Dollar on a weekly LOG scale.  There are some clearly marked  channels here, with a potential large, prominent triangle featured (shown with two potential lower trendlines, one red and one dashed blue line):

-

I will be providing updates on this U.S. Dollar situation regularly as it deserves very close monitoring…

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1324.09 as this post is written

Two recent articles highlight the current state of what appears to be known and unknown concerning the situation, including the potential of customers to “get their money back.”

These two articles are the January 30 Wall Street Journal article titled “Money From MF Global Feared Gone” as well as the January 31 New York Times article titled “After a Delay, MF Global’s Missing Money Is Traced.”

Overall, I find the events that have transpired at MF Global to be highly disconcerting, and they raise many questions about broader issues concerning financial institution and financial system integrity.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1325.81 as this post is written

The chart below illustrates this divergence; it shows the S&P500 vs. the Shanghai Composite on a daily basis, since 2006:

(click on chart to enlarge image)(chart courtesy of StockCharts.com)

-

It is notable that the Shanghai Composite led the SPX (S&P500) significantly in late ’08 – early ’09, yet it has been declining lately.

I continue to find this divergence between the S&P500 and  Shanghai Composite to be notable and disconcerting, on an “all things considered” basis.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1292.48 as this post is written

My overall analysis indicates a continuing elevated and growing level of danger.

I continue to believe the October 4 1074.77 low on the S&P500 will not be a “lasting bottom”, and the dynamics as described in the October 20 post (“Thoughts On The Next Stock Market Decline“) and the likelihood of longer-term substantial “downside” still apply.

Furthermore, as I mentioned in that October 17 post:

Of further concern is whether, and when, the above-mentioned problems might reach a point at which another (financial system) crash occurs.  I am particularly concerned about the prospects of the next crash for a number of reasons, of which I will elaborate upon shortly.

(The elaboration on this “next crash” was subsequently addressed in the post of January 6, 2012 titled “The Next Crash And Its Significance.”)

Predicting the timing and extent of a stock market crash is always difficult, and the immense complexity of today’s economic situation makes such a prediction even more challenging.  That being said, my analyses indicate that the danger inherent in the financial system has reached a level at which a stock market crash – that would also involve (as seen in 2008) various other markets as well – has reached a level at which a near-term crash is (at least) a significant concern.

As reference, below is a 1-year daily chart of the S&P500, indicating both the 50dma and 200dma:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1292.08 as this post is written

The following three charts illustrate various technical analysis aspects of the U.S. Dollar, as depicted by the U.S. Dollar Index.

First, a look at the monthly U.S. Dollar from 1983.  This clearly shows a long-term weakness, with the blue line showing technical support (until 2007):

(charts courtesy of StockCharts.com; annotations by the author)

(click on charts to enlarge images)

-

Next, another chart, this one focused on the daily U.S. Dollar since 2000 on a LOG scale.  The red line represents both a trendline as well as a relatively good visual “best-fit” line.  The gray dotted line is the 200-day M.A. (moving average).  As seen on this chart, the U.S. Dollar looks vulnerable to continuing its downward trend that has been interrupted since early 2008:

-

Lastly, a chart of the Dollar on a weekly LOG scale.  There are some clearly marked  channels here, with a potential large, prominent triangle featured (shown with two potential lower trendlines, one red and one dashed blue line):

-

I will be providing updates on this U.S. Dollar situation regularly as it deserves very close monitoring…

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1268.24 as this post is written

As seen in the subtitle, the strategists at the 13 firms expect, on average, for the S&P500 to end 2012 at 1334, a 6.1% gain.   The median price forecast is 1340.

The article also shows how each firm’s 2011 forecasts fared vs. the actual S&P500 close of 1257.6; all but one of the forecasts proved to be too high.

_____

I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1277.30 as this post is written

I continue to believe that the “price action” of various financial stocks is disconcerting.  I view the poor performance of these financial and brokerage stocks to be one indicator among (very) many that serves as a “red flag” as to the financial markets and economy as a whole.

Here is an updated chart to that shown in the June 29 post.  It shows the XLF (the financial ETF) on a daily basis since 2007.  As well, the S&P500 is plotted above it, with GS and JPM shown below it.  The blue line on each indicates the 200dma:

(click on chart image to enlarge)(chart courtesy of StockCharts.com; chart created by and annotated by author)

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1277.06 as this post is written