Put/Call Ratio Showing Sell Warning For Stocks - 4-19-16

Click on Chart to Enlarge

I have shown this chart many times in recent years, and it provides relevant context for the position of the market time and time again in my experience.

In this case, the 5 day average of the total put/call ratio is below it 1 standard deviation band on both the 20 period and 126 period time frames.  So there is a type of dual time frame extreme here demonstrating complacency in the options market.

However, note that this is occurring with prices NOT making new highs for the bull market.  So a 2 year low in the moving averages of the put/call ratio is occurring, and yet prices are not making new highs.  To me this suggests a market that is ripe for a significant top to be made.

Arguably the biggest weight pulling the market down has been energy and commodity related issues.  And this may be true, but the Commitment of Traders data on crude oil futures shows that the rally over the last couple months in crude oil has been a typical short covering rally.  Overall positions declined.  Shorts declined, but also longs did as well.  So the net buying was the covering of short open interest.  That is not a pattern in the big money players which is typical of healthy leg up in a bull market, or of new speculative interest coming into oil.  This suggests that oil will likely still see yet lower lows in its bear market.  And so my point here is that it doesn't appear that the weight of the energy sector's pull on the market has run its course. So my guess here is that we see the oil rally fizzle out and move to new bear market lows, and that stocks take another leg down in the process. It would not surprise me if this next move down in stocks was a big one and broke the support around 1800 in the S&P 500.  Understand that as prices move lower there is increased volatility typically, and the possibility that some related companies bankrupt from the leverage they have in play in the market which is moving lower.  And that type of context tends to cross barriers into other sectors of the market and "trickle" down.  So that is possibly the rationalization of the next big move down in stocks if it does come here before new bull market highs are made.


Pete

2015 Stock Market, Bull Market Top - Bearish Divergence

2015 Stock Market, Bull Market Top - Bearish Divergence

It appears likely to me that the current bull market in stocks since 2009 is over or is in its finals stages. Whether it can be prolonged a few weeks or months, is probably quite reasonable, but I doubt that the current 5th year of the decade will have the same shine as it historically has.
There is bearish divergence in price, sentiment and breadth in the market on multiple time frame.
Additionally, price has now made a failed breakout and reversed below prior highs in several indexes, which is a typical topping pattern as smart money sells heavily into new high trying to unload right at the top.
Toward the end of the video above I was looking for some prior published material I posted on crude oil and did not find it in a blog post.  But the information is contained in a video I published on YouTube from June 18th 2014.  The video did not cover the Commitment of Traders data, only the technical analysis and pattern analysis.  So a longer term monthly chart of crude oil with the CoT positions is shown below.  From the green line on the bottom pane you can see speculators' positions reaching new all time highs in 2014 despite lower price peaks compared to 2013, 2011, and 2008.

Crude Oil Commitment of Traders Chart
The point here again is that crude oil price gains were made by speculators buying.  And there is no actual intent for use by the large specs.  It is only leveraged speculation for profit.  And the subsequent vertical price decline in 2014 (similar to 2008) shows the type of move that can occur with unwinding of that leverage with no real tangible demand.  Interestingly, it appears that there are still currently more long contracts held by speculators that there were held at the PEAK of the 2008 high in oil.  So, in the longer term view, it seems likely that oil will continue its bear market - I would guess breaking the 2008 lows, and possibly the 2001 and/or 1998 lows.
So the situation in stocks is that the bull market has been pushed higher on record margin debt, which has peaked (so far anyway) ahead of price - as it has at the last two bull market peaks.  And this fits in with a divergence theory of market trend changes where you will see the underlying buying/selling behavior peak and diverge prior to the price peak and turn.  The following link is from a website that I am just posting to give you a visual of the margin situation.
I don't want to over complicate the situation.  Bull market tops will lull the crowd into risk complacency.  All things move in cycles, and there will be an end to the current upward cycle in stock prices, followed by new cycles again.  So on a pragmatic basis the question is whether you have an objective strategy for exiting this market.  Do you?  
I have suggested various forms of trailing stops that can be used in the market or as an analytical red flag to take action.  I will make an update in the near future with further details of trade ideas and chart points at which I would suggest price has not only hinted, but CONFIRMED that the market is likely topped for investment purposes.
Pete