Daily Update & Forecast – January 25th, 2016
State of the Market Address:
- The Dow has finally broke above its recent trading range and above historic 20,000 level.
- Shiller's Adjusted S&P P/E ratio jumped to 28.5. Arguably the second highest level in history (if we adjust for 2000 distortions) and right behind 1929 top at 29.55.
- Weekly RSI at 72. Severely overbought. Daily RSI is at 65.80 - approaching overbought levels again.
- Prior years corrections terminated at around 200 day moving average. Located at around 17,000 today (on weekly).
- Weekly stochastics remain at 95.29. Extremely overbought level associated with prior market peaks. Daily at 69 - once again approaching overbought levels
- VIX/VXX either at or approaching their historic lows.
- Last week's CTO Reports suggest that commercials (smart money) are shifting their positioning to net short. For instance, the Dow is 5X, the S&P is at 2X and the Nasdaq is at 4X short. That is a significant short position against the market.
- Demand for VIX has spiked. Two weeks ago investors have purchased 250,000 VIX call options with a strike price at 21, and another 100,000 with the strike at 22. Commercial VIX position is at 5X long.
In summary: For the time being the market remains in a clear bull trend. Yet, a number of longer-term indicators suggest the market might experience a substantial correction ahead. The market remains at extreme valuation levels and severely overbought on weekly charts. Plus, the "smart money" is positioning for some sort of a sell-off. Short-term, the market is back to being overbought.
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