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Monday, November 11, 2013

A few interesting charts

There has been a serious lack of anything interesting to show on the blog for quite some time.  Here are a few things I ran across lately.

First up is the housing affordability index.

The rise in rates is seriously crimping housing affordability.  It is now at the worst levels for decades.  It is lower then it was at the height of the bubble.  This is likely to slow the housing market in the months ahead.  Will home builder stocks be affected?  Will the economy itself be affected?

Here is a look at the II bull/bear spread.


The only time in this bull market the spread was higher then now was in 2011.  That preceded a near 20% drop.  The high spreads in 2010 also preceded sizable pullbacks including the flash crash.  That was quite a jump in the spread over the last few weeks.  People are definitely heavily long now.

This next chart suggests that hedging is at a minimum now.


This chart is from Shaeffer's research.  They think that many money managers today use VIX call options to hedge their new long positions.  Notice the first part of the year when the green line would spike up with moves up in SPX.  That was also common last year.  In that mode it would seem to indicate it could be an indicator of hedging new long positions as Shaeffer's research suggest.  The relationship started breaking down starting with the May rally.   No longer is the green line going up on rallies.  The June pullback did not see a jump in the green line, but the last two pullbacks did.  I guess nobody was worried in June enough to hedge.  They were a little worried this fall though.  The current move up would seem to have very little hedging activity with it.  This goes along with the big move up in bullish sentiment in the prior chart.  Nothing can go wrong between now and year end so why hedge.

We have the second highest bullish sentiment spread in this bull market combined with what appears to be a very low level of hedging activity.  This does not guarantee that something will go wrong of course.  However, it does suggest that if something does go wrong and the market does sell off it could do so in a bigger way then many expect.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.