Daily Stock Market Update & Forecast – Feb. 1st, 2017

State of the Market Address:

  • The Dow remains below 20K.
  • Shiller's Adjusted S&P P/E ratio remains around 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 66.71. Approaching severely overbought. Daily RSI is at 53 - neutral.
  • Prior years corrections terminated at around 200 day moving average. Located at around 17,100 today (on weekly).
  • Weekly stochastics remain at 93.52. Extremely overbought level associated with prior market peaks. Daily at 52 - neutral.
  • VIX/VXX either at or approaching their historic lows. Commercial VIX long interest approaching record highs. At 6X net long.
  • 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 3X 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.

Did the sell-off start today? 

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