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Checking In On The Trend Extremes - 2/26/17

|Includes: LQD, SPDR S&P 500 Trust ETF (SPY), VIXY

As the equity indices continue to forge new highs, our TrendFlex extreme indicators, utilized to identify a potential change in the market trend, hover around neutral to extreme readings.

Our Corporate Bond vs. S&P 500 index ratio as seen at the bottom half of this chart, pushed to a new low this week, and gapped widely below its moving average. This is an extreme reading that bears watching for a trend shift.

Our TED Spread indicator is neutral but on the verge of turning to a new extreme. Note below how the CCI reading (bottom portion of chart), once it moves to the +100 level of the chart (blue sections), tends to precede a decline in equities. Conversely, note the red zone (-100 reading) where the indicator foreshadowed a surge in the S&P 500.

Finally, our VIX and Put/Call indicators are mixed. Although VIX has met up with its moving average (we look for large gaps from its moving average to confirm a pending trend change), it remains rather low at 11.47.

As the chart below depicts, VIX can remain low for a while before equities correct (see the blue vertical lines where VIX settled in the past near where it is today.

So perhaps equities are nearing the point where a consolidation or modest (5%?) correction is in the cards, which will hopefully dissipate some of the froth in the markets and introduce a new buying opportunity. As the new administration moves further out of the honeymoon period, however, the challenge to pass business-friendly tax and other economic policies may begin to cast a shadow on bullish sentiment.