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Danger Will Robinson...Danger!

The markets are always willing to talk to those who bother listening. In this specific moment in time, the few tried and tested sentiment indicators that Dr. Kellegro follows are flailing their arms and signaling danger dead ahead. We can never know the scale of the danger to come, what shape it will take or how many will perish as a result of its ferocity,  but nevertheless, it is close enough that all those who are opposed to being on Team Rabbit Ears should probably step aside for a considerable amount of time.

Unfortunately, the anecdotal evidence that used to be fairly simple to gauge from hearing gym chatter, work chatter or taxi cab chatter has dissappeared almost completely. It used to be a fairly accurate indicator that when certain individuals or groups of individuals started talking about the markets excessively, an intermediate term top was all but imminent. The institutional crowd that is left over in the wasteland of what was once the retail investors playground are decidedly tight-lipped. Even if they do decide to give an opinion it is typically very cryptic and rarely reveals what they are truly doing in the marketplace.

There are, however, some tried and true indicators that tell us how frothy things are getting. These indicators, like all others, have their moments when they have worked like absolute gems and have other moments when they have failed entirely. However, they are, for the most part, reliable. Not for indicating the top or bottom of a move to the precise day or time, but rather to let us know that we are approaching the “danger Will Robinson” geography of the marketplace.

My favorite sentiment indicator of all is the 20 day moving average of the total CBOE Put/Call Ratio:

If you look at the blue line (20 day moving average), you will notice that the combined put/call ratio has reached a point not seen in 3+ years. Those who are participating in this market seem to be abandoning puts and buying calls with what some would call reckless abandon. This tells us that we are reaching a point where the market will either begin falling, perhaps sharply. Or it could be in for a period of prolonged sideways movement where there are enough dips and slides that it brings bullish sentiment down to more normalized levels. Either way, we are heading for a period where gains will be more difficult to come by.

Next we have a different indicator. This is the percentage of stocks in the S&P 500 that are above their respective 50 day moving averages:

You can see here that we have reached levels that are telling us that the run is hitting some levels that yield a very poor risk/reward on the upside.

Nasdaq new highs and new lows is begging to make an appearance here. Who am I to say no?

Much of the same. What we are seeing here is a man who has just downed a half liter of Absolut and is attempting to reenact the final scene in the Karate Kid from the roof of Dubai’s Burj Khalifa.

And next we have the Nasdaq Composite Bullish % Index. This indicator is holding hands with NAHL while they decide when to jump. However, in the case of BPCOMPQ, we have also have a negative divergence, as the Nasdaq is hitting highs and this indicator is not.

These are all real money indicators. We’re not talking about sentiment surveys that can easily be manipulated. The money flow is hitting multi-year highs in terms of bullishness. We have to ask ourselves, who…besides the Fed…is left to buy here? Now that investors are all talking about the Fed supporting the markets, could it be that the music in this game of musical chairs is about to stop? Dr. Kellegro thinks so…and is positioning the portfolio accordingly.

Day 15…Dr. Kellegro is listening.