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Wednesday, January 22, 2020

Update 1/22 Several interesting tidbits

I think most people agree the market is getting very frothy.  This morning I heard someone on CNBC trying to argue that the market can be expensive without being overvalued.  An example given was real estate.  A price that might be expensive in one place might be cheap in another location.  I would agree with that, but what has that got to do with stocks.  I don't know of anybody that understands historical valuation measures that does not think the market is overvalued.

I also heard Jim Cramer talking about a taxi driver asking him about the VIX.  What is wrong with the VIX.  Cramer asked him why he wanted to know.  The driver said he was short the VIX, but it was not going down like it was supposed to.  You might recall the famous story about knowing a top is near when taxi drivers start giving out stock tips.  That does not apply so much now because so much money has moved into index funds.  Many retail investors do not buy individual stocks anymore.  I started wondering if the taxi driver trading the VIX is about the same as giving out stock tips.

At the noon time round table on CNBC it turns out all the money managers admitted they were trimming positions.  Everybody was careful to say they were optimistic, but they were selling not buying. 

SPX is gapping up nearly everyday and has been for months.  This type of action is usually associated with a blow off move.  Some bull markets have ended with similar moves so we need to keep an eye out.  I also ran into some interesting charts that speak to the issue of a top.


The smart money index is at the lowest levels in the last two years.  Meanwhile the dumb money is at the highest levels of the last two years.  I am thinking better to side with the smart money.  This charts shows very clearly what I have been saying about this rally being driven by the retail investor.

For those not familiar with options, trades can be made two ways.  A trader can open a position by selling an option or buying one.  Option sellers are generally the more experience traders.  This chart shows that call option buying is at the highest levels on the chart which goes back to 2000.  It also shows two peaks in 2018 nearly as high that were followed by 10% and 20% corrections.  This is a sentiment chart based on real money and it is showing a lot of optimism!

This chart shows how crazy the market has become.  The top 5 stocks by capitalization in the S&P 500 make up over 17% of the entire index.  That beats the 16% at the height of the dot com bubble.

We have a very frothy market combined with a much weaker economy than in 2018.  Here is a look at industrial production.

IP peaked out in late 2018.  It is not clearly in a downtrend like 2015 and 2016, but it is not keeping up with the market either.


The manufacturing ISM number is the weakest it has been since the recovery started in 2009.

This chart is showing a rather straight up move since early Oct.  The caution flags are waving all over the place.  This is a frothy market and I think we should expect a sizable correction coming soon.  A frothy market and a somewhat weak economy could be a recipe for a bull market top.  Be vigilant.


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