Monday, February 6, 2017

S&P Topping

The S&P is in a long, dragged out topping process.  Much like 2015, you won't have one moment in time to say that is the top.  You will have many moments during the topping process where selling is long term favorable.  The S&P around 2300 is very likely to be one of those points.  There is a growing divergence between the US and Europe, and of course Japan, so far this year.  The S&P is hanging tough, right at all time highs, while the other equity markets fade, one by one.  First it was the emerging markets, then came Japan, and now Europe.  These selling waves eventually gather enough momentum and take down the big boss, the S&P.

On Friday, I noticed quite a change in tone and attitude from the CNBC Fast Money crew.  I force myself to watch it because I need to get in touch with what the general investing public is thinking about, and what there mood is.  From being a bit pessimistic earlier in the week, due to Trump's immigration policies, to being optimistic again, for no real reason other than prices going higher.  Nothing much has changed.  The ISEE call index printed over 200, meaning you had over 2 times as many calls bought as puts.  That is usually an extreme level where the market often tops out at.  The equity put/call ratio was also low in the CBOE.  The crowd seems to have gotten a bit too optimistic here, and I am looking for shorts either today or Tuesday.

This market lacks the buying firepower that it had in November/December.  There isn't that much selling yet, but the buyers are definitely thinning out, as you can see from that sudden drop early last week.  There is a bit more volatility at the top now.  Nothing big, but enough to get me interested in shorting strength.  SPX 2300 should provide a tough level of resistance that I can short against, to target a 30-40 point pullback.  Nothing big, but considering the low risk, a short worth taking.

Bonds looks like they want to go higher, and they are staying firm despite all time highs on the S&P.  Look for the 5 year yields to retest that important 1.80% level soon if we get that pullback in the S&P that I expect.

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