Analysis | April 14, 2021

SP500 In a blow off phase?

The SP500 is a strong bull trend and the market consensus is out and out bullish but the market is now a bubble and driven purely by sentiment. It’s now in a blow-off phase and while it can go higher in the short term there are warnings of a correction coming as the six charts below show…

A Blow-off is coming: We cant time it as blow-offs can take a while to play out but when it does come the sell-off should be ugly.

How Overbought are stocks? Goldman Sachs SP500 V Financial Conditions: This Shows we are in the biggest bubble in history and so too does Warren Buffets favourite indicator:

Options Trading is now Showing Traders Seeing the Only Way is Up

If you want to see how bullish traders are off stocks the options market tells us with call option buying going parabolic. Call options are a bet on higher stock prices and the buying has gone parabolic this year

Put Options are a bet on lower prices and we can see in the Put/Call ratio that traders now favour puts over calls by a record amount

Traders are so bullish of the market they have started selling puts which gives them unlimited risk and limited gains (Buying put options gives limited risk against unlimited gains) and the limited gain on puts is small against the risk and is being done by an increasing number of retail traders who have no real idea of the risk there taking. Selling puts is a great example of a bullish extreme. If you were to buy a put option the market is so bullish there very cheap against calls which are bets on the market rising.

The Blow Off Phase “This Time It’s Different”

What we know from history is when any bubble occurs – traders say “this time it’s different” and they’re saying this in the bubble that’s occurring now: “The fed will support the stock market” and “valuations have changed due to COVID” Etc. The crowd can be right for a period of time but crowds are stupid and no bubble ever ends well. Like we said in the intro blow-off phases are hard to time but any trader who is long should look to protect in our view and contrary traders can look for shorting opportunities on weakness…

SP500 Technical Levels

From a technical perspective, the chart is a clear uptrend and we are at new multi-year highs. As we can see on the chart we are trending higher in the last 14 days after breaking out to the upside and it’s a low volatility grind. Levels of support can be sold if broken and then in our view, traders should look for immediate follow through to the downside. On the other side traders who are long can protect by placing stops behind first or second-level support.



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