Short-term Outlook (1-5 Days):  Neutral  From Apr 23, 1215 SPX

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Equity Indicators - Updates and Extremes

Total Put/Call Ratio

The idea of buying protective put options seems about as popular as a prophylactic vending machine at a Lamaze class - there just ain't no need for 'em.

This has become old hat by now, but it remains the single most dangerous aspect about the current market.  When there is little built-up protection (in the form of put options) underneath the market, we are subject to the possibility (probability, actually) of a swift, sharp kick.

There have been a handful of times since the "new era" market emerged in March 2009.  The table below shows what happened in the S&P 500 in the two weeks following each instance.

Obviously, anything longer-term than a week or so would show mostly bullish results, and it pays to keep that in mind.  It also (might) pay to understand that even during the massive run-up, the market has not held onto any further short-term gains after the p/c ratio sunk to its current level.

Rydex Bull Ratio

Leveraged and inverse exchange-traded funds have become quite popular, and it has taken market share from the mutual funds that essentially invented the market.  Rydex is chief among them.

Similar to the idea of put options, Rydex investors just aren't seeing much need to hedge or speculate on the downside anymore.  The amount of assets invested in the leveraged inverse S&P 500 fund just yesterday sank to a new low since these funds started gaining in popularity in 2002.

That kind of attitude has pushed the Bull Ratio to a new 8-year high.  The chart below shows the two other recent occurrences when it did so.

The first one, on August 10th, led to some initial chop, then the S&P lost about 30 points in a quick fashion.  The other was on January 12th of this year, which also led to some short-term chop, and then about an 80-point decline.

NYSE New Highs

The #1 argument for higher prices among technicians has been the outstanding breadth of the market.  Included in that is the number of stocks hitting new 52-week highs.

They certainly got more ammunition yesterday, as the number of new highs reached a new plateau, climbing to the highest number in more than three years.  Quote vendors vary with this, but for historical testing I use Reuters data.

Surely that's a major buy signal, right?  Let's go back to the beginning of my data set in 1965 and see...

Personally, I don't think a surge in new highs to such an extreme is an excellent buy signal.  The textbooks will say otherwise, but history doesn't necessarily back it up.

It's not a major sell signal, either.  If there is one general theme we could conclude, it would be that the market is more likely to chop around than anything, especially in the shorter-term of under one month.

After that, the long-term upward drift of the market since '65 took hold.  Out of all the instances, there were only 2 that showed substantial losses of -5% or more after six months, while 12 of them showed gains of +5% or more.

Over the next two weeks, the market mostly chopped lower.  The biggest exceptions were in October 1982 (after the S&P had rallied "only" 25% a couple of months off its bottom), and May 2003 (very similar to the '82 low, at that point the S&P was only a couple of months and about 18% above its low).  Those appear quite unlike the current situation of being more than a year and 78% past the low point.

NYSE Arms Index

We've been seeing some outstanding breadth numbers lately.  Mostly good, some weird.

Take the Arms Index for example (it's also more commonly known as the TRIN).  Over the past 10 days, it has moved to an average of 1.38.  This is quite high, and is more akin to an oversold reading than an overbought one.  It tells us that the skew in volume has been towards stocks that have declined instead of risen.

This would be typical if stocks in general were actually, I don't know...declining.  Obviously that's not the case.  There have been only four other times since 1940 that the 10-day TRIN was greater than 1.2 at the same time the S&P 500 just hit a new one-year high.  It hasn't occurred in more than 50 years.

For those curious, the dates were:

*  01/21/43 - The S&P rose dramatically (6%+) for the next month, chopped for a month, then kicked higher again.

*  05/10/50 - The S&P rose 6% over the next month, then plunged 14% during the next month.

*  01/11/52 -  The S&P rose about 3% over the next couple of weeks, then dropped 6% over the next few.

*  01/15/59 - The S&P topped out soon thereafter and dropped 4% over the next few weeks before moving on to new highs during the next month.

I don't see too much to glean from the data, as the last instance was more than five decades ago.  But it was so unusual, and the indicator is so popular, I thought I'd point it out.

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