Checking in on the Slow Boiling Bullfrogs (Market Sentiment)

No frogs were harmed in the making of this video! At the time of a boil it’s a rubber stunt frog, which gave me a sense of relief as I watched.

As part of the S&P 500 top-test scenario we have favored since February a key component to a failed test would be that the frightened Bullfrogs that jumped out of the pot in February and March would return, settle in and get nice and comfy. Maybe not with the bounce in their hop that they had in January but well, comfy.

The VIX is on a little pop today as Friday’s twitch of anxiety extends. But the move is far from conclusive. VIX has been a good sign that relative complacency and comfort have been restored here in the dead of summer.

But in NFTRH 510 we did note a couple of potential issues (among many indicators reviewed, so please don’t take this as comprehensive analysis).

The 10 week exponential moving average of the Equity Put/Call Ratio has a tendency to exert pressure on the market when it is rising and release pressure when it is dropping. Sort of like the pressure cooker in which sits Mr. Froggy up there. VIX has had ’em nice and sleepy as they adjust to the slowly building summer heat and CPCE, while still trending down from 2016, has the potential to pop upward if it holds red trend channel.

Here is but one view to show the risk that is built into the market, to go along with Friday’s article S&P 500 vs. Gold; a Closer Look at Risk.

Consumer Discretionary, with its heavy Amazon weighting and all, has stalled vs. boring old Consumer Staples. Sure, it’s a ratio and it’s just a chart pattern. But the extremely overbought reading from which it rolled over on the weekly chart is a picture of risk. What happens if the ratio rolls over to a new short-term low (i.e. breaks the pattern’s implied support)? The green support area, which corresponds with several nominal market indexes, is what could happen. Also a gap at the 1.90s implies some sort of bull emotion got in the market. Maybe a routine correction is all that is ahead.

I am not playing fear monger on a bad day in the market. Indeed, I think there is still the chance of another burst upward before the big decision point at the SPX gap above 2860. At that decision point we also have an alternate (but less favored) plan, and it’s very bullish, near-term. But I have raised cash, held shorts and remain aware that having balance pays because cash pays (meager yield by historical standards, but you get the point).

I am very interested in how the mid-summer risk view plays out and resolve to stay open minded. But the Bullfrogs and the pressure cooker are on message at this time.

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