Extreme & Historic Complacency Building in Markets

Today is almost exactly two months since I last posted on this blog.

On November 8 2019, I consolidated over a dozen charts into a report, from hundreds of charts I had shared on Twitter over the course of 2019. Then I wrote a comprehensive review showing overwhelming evidence Stocks were accelerating higher from massive 2-year bases (see: The True Message of the Market (and Thinking for Yourself)).

For those who started following my work recently, you should know that I spent most of 2019 reiterating my extremely Bullish case for Global Equities, including a cyclical resurgence theme led by Semis, Tech, Banks and Industrials.

Yet even though Stocks were up a lot last year, being Bullish was never an “easy” trade to make. In fact until the very end of 2019 – even as Stocks began to break out in October and November, the cesspool of Twitter permabears kept reminding me daily they were going to “take the other side” of my trade. They were absolutely certain of the Bear case, they were not listening to the market, and they got destroyed.

For medium-term investors who don’t care much about short-term 1-2 month swings, I should add that my view is that 2020 as a whole should be favorable for Equities – even more so if we think of relative performance versus Bonds & Defensive assets. There are several reasons why I think this, the two most important ones being: (1) supportive Central Banks (for now) and (2) Credit markets unlikely to have major problems until 2021-2023, especially if Rates remain where they are now.

Having said that, I am not a long-term investor – and if you’re like me, an Equity & Macro trader that cares very much if the S&P moves 5-10% against me, then what we have right now is a potential big problem brewing.

Over the past several weeks, I have begun writing my biggest report since November, which is still in progress and if markets continue to grind higher, they’ll likely generate some of the most extreme chart signals in history.

It’s already happening in the Options markets, where extreme & historic complacency is now in full display:

Above, the 50-day Put/Call Ratio (inverted) has dropped to 0.56, among the most extreme overbought readings in 20 years. Remember this is the same indicator I discussed in November – when people were pointing to a 1-day overbought Put/Call reading and saying markets were euphoric. They weren’t. But now they certainly look that way.

ZOOM 2001-2005:
JUN 2001 Bear Market rally topped and rolled over (not applicable to today)
JAN 2004 Topped 1% higher then corrected -9% over the next six months
JUL 2005 Topped less than 1% higher then corrected -6% over the next two months

ZOOM 2009-2020:
APR 2010 Topped 1% higher then corrected -17% over the next two months
DEC 2010 Market ignored the signal, extended +7% in two months, then gave it all back in one month, then spent four months topping and fell -22% (for traders, this was the only signal that failed in 20 years)
DEC 2013 Topped less than 1% higher then corrected -6% in one month
JUL 2014 Topped less than 1% higher then corrected -4% in two weeks, rallied back to the highs then dropped -10% in one month
JAN 2018 Market had already topped, corrected a total -12% in two weeks

If history is a guide, the risk-reward over the next 1-2 months is moving towards “extremely poor”, and we shouldn’t rule out a compressed (front-loaded) decline either. All that’s needed is a “catalyst”, as always just a narrative/excuse to trigger deleveraging.

My goal for the next few weeks is to finish my next comprehensive chart review and post it here on the Blog. What I can already say is – the data picture has swung almost completely since November. Maybe Stocks will continue to grind a few points higher, generating even more extreme signals in the coming weeks. Personally, I don’t think the odds favor such an outcome – instability is rising significantly and there’s enough pressure accumulating that anything could trigger the start of a corrective phase into later Q1.

Right now, I believe that traders who are able to identify such a corrective phase when it begins, and are able to take steps to protect capital and then monitor for Long entry on the other side, have the chance to make this Q1 period potentially the most important allocation decision of the year. This is where I’ll be focusing all my attention in coming weeks – back with more soon.

Thanks for reading.

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