Chart Of The Day: Are Investors Overly Bullish?
Investing.com | Jan 09, 2020 20:39
We recently turned cautiously bullish after holding in our bearishness since the 2018 plunge that remained a hair's breadth away from a formal bear market.
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However, signs have been mounting that perhaps investors have been lulled into a sense of complacency. We're also questioning our own recent bullishness, as we’re concerned investors are thinking only about the short term, despite increasing long-term risks.
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Bearish put options pricing has been dropping relative to call options, reaching extremely low levels, infrequently reached throughout this bull market.
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The recent rally was spread among 82 of the companies listed on the S&P 500 Index who have been trading above their 200 DMAs – a two-year high. This suggests wide participation and when coupled with the lowest put/call ratio, we see a red flag.
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Another gauge whose measure is extreme – and therefore potentially unsustainable – are ETFs. Traders seem to be placing many eggs in few baskets, overwhelmingly betting that the rally in equities will keep going.
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As we can see in the chart, traders sharply increased leverage longs, while drastically dropping leveraged shorts, another sign of a potential herd mentality.
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While the price is headed toward a new record high, the RSI and MACD both provide negative divergences. If the RSI were to retest its previous low and break it, we could potentially see the price follow.
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For the RSI, it’s the most overbought condition since January 2018, while for the MACD it’s the highest since February 2019.
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Conservative traders would sit this out, as the trend is still up.
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Moderate traders may risk a short with a close below 3,200, below the December lows.
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Aggressive traders may risk a contrarian short position, providing they understand the risks and have prepared a trading plan accordingly.
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