EconomicGreenfield

I have frequently commented how my overall analysis indicates that our economic situation is of high complexity.  This complexity also applies to movements in the financial markets.

As such, predicting the timing of various major stock market events, such as major tops, bottoms, and especially “crashes” is difficult.

That being said, a variety of factors leads me to believe that it is likely that today we are seeing a stock market (as depicted by the S&P500) “top” from the move that began on October 4, 2011.  As of this writing, the high for the day is 1351.00, with the current price at 1350.07.

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)

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1350.07 as this post is written

In this post I would like to highlight various areas which I believe indicate excessively positive sentiment and problematical technical analysis measures in the stock market.

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.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1343.09 as this post is written

Yesterday (January 4, 2012) The Wall Street Journal had an article titled “Street Wary on Its Random Walk.”  In this article, 2012 S&P500 price forecasts from 13 financial firms are displayed and discussed.

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.

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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.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1277.30 as this post is written

On June 29 I wrote a blog post titled “Financial Stocks – Notable Price Action.”

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)

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1277.06 as this post is written

In the June 29 post (“Financial Stocks – Notable Price Action”) I wrote the following:

I think that the relatively poor “price action” of various financial stocks is notable.  It is one of many current indications that overall stock market health is not as strong as a casual glance at the major indices would indicate.

I continue to believe that the lagging / “sagging” price of various financial stocks is highly notable.  Here is another chart that I created a while ago that provides another view of the poor “price action” of the financial stocks vs. that of the entire stock market, as depicted by the S&P500:

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

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The above chart is depicted on a daily basis, LOG scale, since 2007.   On each of the three plots, a blue line depicts the 50dma for perspective.

As one can see, there has been an interesting progression of the relative price of the XLF (Financial SPDR) vs. the S&P500, as seen in the top of the chart.  In the middle of the chart, the same can be seen in the $XBD (Broker/Dealer Index).  Generally, since mid-2009, the price of both the XLF and $XBD have been on a slow downward trajectory relative to the price of the S&P500.  The S&P500 is plotted on the bottom of the chart.

In my experience, any time the financials lag the general stock market for a considerable period, it is generally a “red flag” that should be closely monitored.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1280.98 as this post is written