Historical Comparisons to Low VIX While Overbought In Downtrend -- Look Out Below

I ran a scan going back to Sept 1995 today which looks at a similar set-up to what is occurring now in the SPY etf relative to real money sentiment.  And this scan is totally lopsided, pointing out the tops of major bear market rallies.

The criteria were as follows:

• 252 day EMA pointed down
• 63 day EMA pointed down
• 14,3 %K stochastics greater or equal to 80
• 5 day avg. of 14 period Money flow index is greater than 50
• VIX closes below 30
• 5 day avg of total put/call ratio is less than 63 day average of total put/call ratio

This is what we are seeing now in our market.  Basically the moving averages are in a bear market configuration.  The daily stochastics has cycled up to the overbought region.  The money flow index is above neutral indicating the market is not in the very early stages of a rally off a bottom.  The VIX is at a low level not typically seen in the early stages of a rally from the bottom of a leg down in a bear market.  The last week of trade has shown less put activity relative to calls compared to the last quarter.  So there is sign of optimism in the options market (despite a downtrend, lower highs, etc).

Click on Table to View Past Instances

There were 5 unique instances or periods where this occurred.  All of them led to massive downside skews over the coming months as bear market leg down quickly ensued.  Not each instance here occurred right at the high of the bear market rally.  A few of the days occurred 1-2 weeks before the top of the rally occurred.  But the forward returns show a 10:1 downside skew even over the next 2 months.  

So the message here seems to be a clear red flag for any stock market bulls.  And it certainly seems like a clear signal to speculate on put options.  Entering short here with a stop 3-4% above the market also seems to be a clear strategy for the equity side.

Pete