WHAT WE DO? WE SELL OPTIONS FOR INCOME. WE USE THAT INCOME TO BUY DIVIDEND GROWTH STOCKS!
CHECK OUR TRADES ON OUR FACEBOOK PAGE OR HERE.


Is S&P500 going to crash soon?

It may look like we are on the top and due for a correction. But are we really? I think we are not. Although Friday’s trading and even today’s price action shows weakness in the market we are still in uptrend.

We will see a correction at some point and the S&P 500 will turn down, but I think we are not there yet. Why?

Do you know how contrarian investing works? If so, then you would understand my reasons why we are still in good shape. There are still too many bearish investors out there.

According to Stocktwits about 44% of investors are bearish in today’s market. And we have seen this average bearishness since November 2014 with a few spikes lower and higher than that (i.e. up to 62% to 18% bearish investors and traders).

And now, if you ask me why I think we are still in good shape and how bearishness of investors can prove this I want you to review not too far distant example we already experienced a few years ago (people have really a very short memory).

Do you remember gold price action? In 2011 gold price spiked to $1,826.70 per ounce when it reversed and started its deep correction. When gold crossed over $1,600 per ounce my friend trader told me that we were topping the price of gold because his grandpa who has never invested in anything in his life (he had a defined benefit pension plan) suddenly became extremely bullish in gold and decided to invest in it.

Gold Price Action

In another foreign newspaper in Europe I read an article about people liquidating their savings and moving into gold. Everybody was suddenly bullish. Everybody wanted to buy gold.

My friend uses his “Grandpa Indicator” for this same reason to find out if we are really on the top of anything. Did his grandpa indicator told him to get out of the stocks? Well, not yet.

And yet the same trader uses another, similar indicator – put/call ratio. He once explained to me how that works. If so many people speculate for the market to go up buying calls, be alerted as we may be in trouble.

If too many people expect the market to crash they start buying put protection, we are still good and may expect another pull up.

And how are we doing? According to CBOE data, on January 9th 2015 the put/call ratio was at 1:2. In other words, we saw 6 million open put contracts vs. 3 million call contracts against SPX. No matter what you think, this is quite bullish.

CBOE Open Interest

People are extremely bearish, expecting the market to crash. Media and talking heads are warning us of an imminent market crash. Should we be worried? No, we are not there yet. Just check the chart below. We haven’t broke any trend yet. Yes, the price action is a bit shaky compared to all previous dip buys we experienced. However, we are still in an uptrend.

SPX

There are red flags coming out. I admit. One of the red flags was the Friday session. We received good economic data, but the market sold off. But also note that the market is dragged down by energy sector and oil price drop. Thus it is seasonal and there is no need to be extremely worried.

Yes, the market is and will be volatile this year as bulls will be fighting with bears. We may see pull backs. But crash? I do not think so. Our Grandpa indicator is still calm and doesn’t even know about SPX at all. Once he finds out, it will be the time to get out.
 
 





Leave a Reply

Your email address will not be published. Required fields are marked *