I was recently looking at the CNN money website where they post this fear & green
index. I caught my attention because many other aspects of the market are now
also showing signs an imminent correction in the stock market.
This analysis is a contrarians play, meaning you believe that when mass majority
of market participants are thinking and doing the same thing, you believe the
market is about to change direction.
Let me share with you a few data points that are screaming that the masses
are overly bullish and on stocks, buying shares like they know what they are
doing, and have no fear of stocks dropping in value.
Take a look at the fear & green index below from CNN money.
Notice the current level "Extreme Greed", and also the chart below showing
the historical data. Its trading up near record levels and there is only one
way to go from here - down!
What will change these participant's minds? Well, they need to see stock prices
fall fast and hard and for the crap to get scared out of them before they change
their line of thinking.
The total put/call ratio is something you may follow. I used to follow it,
but now just focus on during what I feel is a critical turning point in the
stock market, like right now.
This is a messy/noisy chart but the important thing to get out of this is
that the black line that is down at extreme lows tells us everyone is betting
and leveraging their money in anticipation of higher stock prices. There is
a delay from when we see low reads like this till the market tops and that
time looks to be any day now.
The red line on this chart is of the SP500 index, which will fall in value
once this last bit of upward momentum stalls out.
The volatility index is trading near long term lows and "when the vix is
low, its time to go", as the old saying says.
Below is not a chart of the vix but rather of a VIX ETF symbol VXX. I talked
about this recently in a trading analysis video for subscribers of my ETF
newsletter.
Long story short, you will should see the repeating price pattern that takes
place. Because of the way VIX ETFs are built they naturally lose value over
time, but that is not the point here. In fact, because of the natural price
decay of this ETF it clearly exaggerates this repeating price pattern in the
VIX would is very difficult to see without the exaggeration of price decay.
Conclusion to Greed, Volatility, and the Put/Call Ratio:
What does this chart point to? Well, keep in mind this is the WEEKLY chart.
But in short, we should expect a BIG spike up in the VIX shortly and a sharp
decline in stock prices.
