It's been almost 4 months since the last time the VIX 5EMA entered the froth zone between 13 & 12.5. Today the 5EMA dropped from Friday's reading of 13.27 to 12.92. While past performance is no guarantee of future performance, each time in the last 17 months when the 5EMA has dropped down near 12.5, the market has put in a short term top of one degree or the other. Because the 5EMA is at 12.92 this indicates that we should get one more green day before there's a pause and perhaps a pull back. To me this just means that rather than chase the market it might be wiser to wait a couple of days and perhaps get a better entry price.
GL
P.S. This is just a 5EMA set up differently but you can use a regular chart of the VIX with a 5EMA to get the same information.
Edit Tuesday morning, 05/13/2014: Adding that back on 4/2, with the VIX 5EMA no where near the froth zone, the P/C ratio closed at .66. The following day, SPX pulled back 2pts to 1888.77. Over the next two sessions, SPX fell to 1845.04. On 4/9/ after a two-day rally, and again with the VIX 5EMA no where near the froth zone, the P/C ratio closed at .61. Over the next two days, SPX fell from 1872.18 down to 1815.69.
Fast forward to Monday, 05/12/2014 and we have the VIX 5EMA at 12.92 and clearly in the froth zone along with a P/C ratio at .64. This suggests to me that market participants have become near term over bullish and that the market is likely to have a cooling off period perhaps starting today, Tuesday, with the catalyst being the disappointing retail sales #'s. IMHO, of course.
Comments
Will_Wong
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Curtiss: Can you update this chart for us? Much appreciated!
Babar
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I remember that chart, great work!
CurtisM
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Babar, thanks.
SimGlenn
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AAII bullish investor sentiment is 28.3% vs. historic average of 39.0%. This indicates sentiment is far from euphoric. I can't reconcile with the low VIX other than professional optimism is higher than small investor.
CurtisM
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P/C ratio dropped to .64 yesterday, so everyone on the same side of the ship. Normally this leads to a pause or minor pull back, which is all I'd be looking at here. Thanks for the AAII info, interesting.
SimGlenn
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I picked up some TVIX today as protection.
CurtisM
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Glenn, that's probably not a bad idea. We might not see anything but we could see pull back of maybe 50-60pts. Based on past history, I'm more inclined to think we'll see the latter. Will have a much better idea at 4:00pm Wednesday.