THE DANGERS OF COMPLACENCY…

Some good stats here from this week’s Mike Santoli piece in Barrons:

“THE MARKET HAS COME A LONG WAY┬áin a little while. McMillan Analysis pointed out Friday that the Standard & Poor’s 500 was three standard deviations above its 20-day average, which tends to portend at least a short, sharp reversal.

The publicity-shy investment pro known here over the past couple of years as the “mystery broker” came into the year a nervous bull, long stocks but keeping the market on a short leash as he awaited confirmation from the tape to determine if it remained a bull market. Those criteria of cyclical, risky-stock leadership, mentioned above, have checked out, yet he’s tactically cautious.

For one thing, the ratio of the 15-day volume of bearish puts on the S&P 100 Index to bullish call volume hit 2-to-1 last week. Traders of these instruments, known as OEX options, are proven smart-money actors, so their caution should be heeded. In the past decade, this ratio hit this level only in February 2007, February 2011 and April 2011; it also nearly reached 2-to-1 in late October of last year.

Each instance foretold an imminent correction of some significance.

The fact that two of these episodes occurred early last year points to the similarity of that market and today’s, with lots of scary macro news being defied by a quietly levitating stock market. Of course, stocks are a bit less pricey versus earnings this year, and have endured pretty trials since then. But the notion that equities have gotten slightly ahead of themselves is as valid now as it was a year ago.

The mystery broker’s verdict: He doesn’t “see more than 2% to 3% upside before [a] correction.”

Source: Barrons

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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