The market has been on one heck of a run over the last five plus years. Since the low in March 2009, the S&P 500, which is a benchmark of the overall market, has gained 194% and is closing in on the 2,000 level, which would make it an even 200%.
That is really hard to fathom. An index of the largest, most developed companies tripling in value in just over five years. During this run, there have only been two pullbacks that really show up on the monthly chart: the summer of 2010 and the summer of 2011.
We haven’t seen a correction of more than 10% in over two years. Are we due for a big one?
With this column being called On The Rebound, I try to keep that title in mind with regard to the material that I present. However, when the market looks like the chart above, it is difficult to find things that fit into a “rebound” column. I have already written about gold, silver and the volatility index (VIX) within the past month or so. These are about the only things that meet the criteria for a rebound at this point.
In addition to this column, I also edit the Value Hunter newsletter. While I don’t have any restrictions on the recommendations that I make in that newsletter, the term “value” has made my job more difficult of late. How do you find values when the market is up almost 200% in just over five years? I can tell you that it isn’t easy.
Over the last few days, I have poured over hundreds and hundreds of charts, looked at a number of indicators and run several different scans looking for investments that I feel good about recommending to subscribers. After all of this, I found three stocks worth considering.
The market that is overbought and overly loved, making it difficult to select stocks that can produce the kinds of gains that I want for my readers.
I talk about sentiment analysis quite a bit as I think it is a critical part of the overall analysis. When you look at the sentiment of the overall market, there are two particular indicators that are very concerning right now: the CBOE (Chicago Board Options Exchange) Equity Put/Call ratio, which is a contrarian indicator measuring the number of put options traded divided by the number of call options traded, and the VIX, which measures the market’s volatility.
The CBOE Equity Put/Call ratio vacillates quite a bit on a day-to-day basis, but when you look at the 21-day moving average of the ratio, you get a good idea of the trend in the sentiment. The 21-day moving average for the ratio dropped to 0.5224 last Friday, and that is the lowest the moving average has been since January 2011.
Even the individual readings are a concern as the reading on Wednesday, June 18 was 0.38. That is the fourth lowest individual reading in the last four years. Because we are measuring puts to calls, a low reading is indicative of bullish sentiment.
The VIX dipped to a low of 10.34 last week and is flirting with dropping below the 10 level for the first time in over seven years. While the VIX, by definition, measures volatility, it is also a good measure of investor complacency. With the VIX at a seven-year low, it is suggesting that investors are very complacent and when investors are complacent, the market is in danger of a sizable pullback.
With all of that being said, beyond gold, silver, and the VIX, I don’t see much that is ready to “rebound”, unless of course you want to look at an inverse exchange-traded fund.
