A Number of Reliable Indicators Giving Warnings

In the last informational post I noted that the VIX (expectations for volatility the next 30 days) had dropped below the VXV (expectations for volatility the next 93 days) by about 10% as indicated by the VIX/VXV ratio dropping to about 0.90. That has been a reliable indicator of near term stock declines during this bear market. Because of the time frames of these volatility indexes, I would expect the next 1-3 months showing further stock declines. This might be a good time frame to look at for option traders (that is, Feb. or March expiration).

Now after this past week, a whole bunch of indicators are starting to give warnings that stocks are overextended to the upside. This is all occurring without the classic type of buying thrust that typically indicates a bear market is over.

In months past I have mentioned that a 10 day simple moving average of put/call ratio data is one of the most trustworthy yet simple ways to gauge market sentiment. Recently the total put/call ratio showed a reading that was stretched relative to standard deviation bands. Now after this week, the 21 day moving average is looking similarly stretched. This is a ratio that does not get stretched often, but when it does, it pays to pay attention. The last comparable readings were October of 2007 and May of 2008, both being major tops.

I won't go into every measure that is showing bearish warnings, because the tried and true ones (in my book) are telling enough. But there is another interesting piece of info that I thought I'd mention. The link below shows a chart and graph quantifying the outlook of the blog world's view on market expectations for the next 30 days.

http://tickersense.typepad.com/ticker_sense/

The interesting thing is that the data suggest a more prolonged period of net bullish blogger opinion than any time since the poll's inception a couple years ago. These blogs are well respected and influential blogs. Bloggers took a major bullish consenus the week of the crash into Oct. 10. Despite the blog world remaining very bullish since that time, stock prices have continued to basically drift sideways to down in volatile fashion since then. In my opinion, this bullish sentiment is out of sync with the reality of prices. This survey is not one that has been around for years, and it is something I only occasionally look at, but I would assume that it would be useful as a contrary indicator in the same manner of classic investment advisor surverys.

For longer term investors, I would think that waiting for a major break of the 2002 bear market lows in the Dow and S&P would be wise before making longer term purchases. Maybe the 5000 level on the Dow and 500 level on the S&P would be times to make major multi-year or multi-decade investments (assuming things actually fall that far).

Pete