The Emerging Equity Bubble of 2010
By
Rennie on Monday, April 12th, 2010 at 10:25 pm
The CBOE equity put/call ratio closed at a very low .40 Monday, its lowest close since last August. I don’t think that’s as troubling as it sounds. The last dozen times the equity ratio hit its lowest level in two months, the S&P was higher 3-5 days later in every case. Also recall that this ratio has been running at unusually low levels for over a month now (see this post on the subject), which is the reason I’ve underweighted this indicator. We’re essentially in uncharted territory. We’ve gone 26 consecutive sessions without an equity put/call ratio over .65 as we close in on the 29-day record (post-2001) set in June/July 2005. There’s no telling how long this current streak will persist, but one thing’s clear – the market will not stage any sort of meaningful decline without a spark of fear.
The 10-day moving average of the equity put/call ratio broke through the .50 level on Monday for the first time in years. You have to look back to the 1999-2000 period to find the last instance in which the 10-day average held persistently below the .50 level (see long-term chart). Since 2001, the 10-day average hasn’t closed under .50 for more than three consecutive sessions, so it will be very interesting to monitor this average over the next few days. Should it hold in unusually low territory, an argument could be made that we’re entering into another equity bubble similar to the 1999-2000 period, which would be consistent with the S&P’s recent break above its long-term trendline channel.
Keep in mind that the S&P500 will close above its 20-day average for a 40th consecutive session as of Tuesday’s close as long as the SPX holds 1175. This will trigger a longer-term buy setup calling for a continuation of the uptrend over the next month (see Sunday’s column).
New 20-day highs across all exchanges exceeded the 2,000 level Monday, a development that usually precedes a day of consolidation. The last thirty times that new 20-day highs hit 2,000+ after closing below that level the previous session are listed below…
New 20-day Highs Hit 2,000+
04/12/10… S&P500 ??? next session
04/05/10… S&P500 +0.2% next session
03/17/10… S&P500 -0.0% next session
03/12/10… S&P500 +0.1% next session
03/05/10… S&P500 -0.0% next session
03/01/10… S&P500 +0.2% next session
01/11/10… S&P500 -0.9% next session
01/04/10… S&P500 +0.3% next session
09/15/09… S&P500 +1.5% next session (*)
09/10/09… S&P500 -0.1% next session
08/03/09… S&P500 +0.3% next session
07/30/09… S&P500 +0.1% next session
07/23/09… S&P500 +0.3% next session
07/20/09… S&P500 +0.4% next session
06/01/09… S&P500 +0.2% next session
05/04/09… S&P500 -0.4% next session
04/29/09… S&P500 -0.1% next session
04/16/09… S&P500 +0.5% next session
04/09/09… S&P500 +0.3% next session
04/02/09… S&P500 +1.0% next session (*)
03/26/09… S&P500 -2.0% next session
03/23/09… S&P500 -2.0% next session
03/19/09… S&P500 -2.0% next session
01/02/09… S&P500 -0.5% next session
09/19/08… S&P500 -3.8% next session
08/11/08… S&P500 -1.2% next session
10/11/07… S&P500 +0.5% next session
10/05/07… S&P500 -0.3% next session
09/19/07… S&P500 -0.7% next session
04/16/07… S&P500 +0.2% next session
10/26/06… S&P500 -0.9% next session
In only two cases out of the last thirty did the S&P gain more than 0.5% the next day, while it fell over 0.5% eight times. In the majority of cases the market closed near unchanged.
The 2-3 day buy setup based on the lower high for the NYSE TICK wasn’t technically triggered Monday as S&P futures failed to settle higher (by 1 tick). Barring any significant new developments, however, I’d still most likely look to buy into weakness on Tuesday. After all, buying the first day with lower lows has worked well the last couple of months, and so far there’s no evidence conditions have changed.
The Emerging Equity Bubble of 2010
By Rennie on Monday, April 12th, 2010 at 10:25 pmThe CBOE equity put/call ratio closed at a very low .40 Monday, its lowest close since last August. I don’t think that’s as troubling as it sounds. The last dozen times the equity ratio hit its lowest level in two months, the S&P was higher 3-5 days later in every case. Also recall that this ratio has been running at unusually low levels for over a month now (see this post on the subject), which is the reason I’ve underweighted this indicator. We’re essentially in uncharted territory. We’ve gone 26 consecutive sessions without an equity put/call ratio over .65 as we close in on the 29-day record (post-2001) set in June/July 2005. There’s no telling how long this current streak will persist, but one thing’s clear – the market will not stage any sort of meaningful decline without a spark of fear.
The 10-day moving average of the equity put/call ratio broke through the .50 level on Monday for the first time in years. You have to look back to the 1999-2000 period to find the last instance in which the 10-day average held persistently below the .50 level (see long-term chart). Since 2001, the 10-day average hasn’t closed under .50 for more than three consecutive sessions, so it will be very interesting to monitor this average over the next few days. Should it hold in unusually low territory, an argument could be made that we’re entering into another equity bubble similar to the 1999-2000 period, which would be consistent with the S&P’s recent break above its long-term trendline channel.
Keep in mind that the S&P500 will close above its 20-day average for a 40th consecutive session as of Tuesday’s close as long as the SPX holds 1175. This will trigger a longer-term buy setup calling for a continuation of the uptrend over the next month (see Sunday’s column).
New 20-day highs across all exchanges exceeded the 2,000 level Monday, a development that usually precedes a day of consolidation. The last thirty times that new 20-day highs hit 2,000+ after closing below that level the previous session are listed below…
New 20-day Highs Hit 2,000+
04/12/10… S&P500 ??? next session
04/05/10… S&P500 +0.2% next session
03/17/10… S&P500 -0.0% next session
03/12/10… S&P500 +0.1% next session
03/05/10… S&P500 -0.0% next session
03/01/10… S&P500 +0.2% next session
01/11/10… S&P500 -0.9% next session
01/04/10… S&P500 +0.3% next session
09/15/09… S&P500 +1.5% next session (*)
09/10/09… S&P500 -0.1% next session
08/03/09… S&P500 +0.3% next session
07/30/09… S&P500 +0.1% next session
07/23/09… S&P500 +0.3% next session
07/20/09… S&P500 +0.4% next session
06/01/09… S&P500 +0.2% next session
05/04/09… S&P500 -0.4% next session
04/29/09… S&P500 -0.1% next session
04/16/09… S&P500 +0.5% next session
04/09/09… S&P500 +0.3% next session
04/02/09… S&P500 +1.0% next session (*)
03/26/09… S&P500 -2.0% next session
03/23/09… S&P500 -2.0% next session
03/19/09… S&P500 -2.0% next session
01/02/09… S&P500 -0.5% next session
09/19/08… S&P500 -3.8% next session
08/11/08… S&P500 -1.2% next session
10/11/07… S&P500 +0.5% next session
10/05/07… S&P500 -0.3% next session
09/19/07… S&P500 -0.7% next session
04/16/07… S&P500 +0.2% next session
10/26/06… S&P500 -0.9% next session
In only two cases out of the last thirty did the S&P gain more than 0.5% the next day, while it fell over 0.5% eight times. In the majority of cases the market closed near unchanged.
The 2-3 day buy setup based on the lower high for the NYSE TICK wasn’t technically triggered Monday as S&P futures failed to settle higher (by 1 tick). Barring any significant new developments, however, I’d still most likely look to buy into weakness on Tuesday. After all, buying the first day with lower lows has worked well the last couple of months, and so far there’s no evidence conditions have changed.