We’ve seen this movie before.
In the first three weeks of 2018, the S&P 500 gained 150 points. That was nearly a 6% gain in just 15 trading days.
I told folks at the time, “Most investors would probably do well to cash out right here, take their 6% profits and take a nap for the rest of the year.”
That same advice might work out just as well today.
We’re just three weeks into 2019 and the S&P 500 is already up 170 points. That’s a 7% gain from where we started the year. Given the pain and suffering so many investors endured in 2018, I suspect a 7% return for all of 2019 would be a welcome result. Getting that result in just three weeks is outstanding.
Investors can cash out, take that gain right here, and then take a nap for the rest of the year.
But, that’s not what most of them are doing. Rather than trimming their long positions as the market ramps higher, investors have been increasing their bullish bets. That’s probably a mistake.
Take a look at this chart of the CBOE Put/Call Ratio (CPC)…
The CPC is a short-term, contrary indicator. It compares the action in call options to the action in put options. A reading above 1.20 shows extreme bearishness among speculators and can indicate a good time to buy stocks for the short term. A reading below 0.80 shows extreme bullishness and could indicate a good time to sell.
The CPC dipped below 0.80 in early December – right before the S&P 500 dropped 450 points in three weeks. The ratio dipped below 0.80 again in late December – after a blistering week-long rally that flipped investor sentiment from extremely bearish to extremely bullish.
The S&P 500 dropped a quick 50 points in just two days after that.
Now, the CPC is back down at 0.80 again. At a minimum, the market is due for a pause right here. And the “worst case” could be a whole lot more damaging.
Investors who are considering piling on even more bullish exposure with the market in this condition might do well to hold off for a bit, take a nap, and see how things look in another week or two.
Best regards and good trading,
P.S. Right now, I foresee a significant turning point in the markets. One that could either devastate your portfolio… or, if you make the right moves, double your money over and over again.
The difference is, of course, whether you’re an investor… or a trader.
We’re quickly entering the best time to be a trader since 2008 – which was one of the most profitable years for my subscribers ever.
I’m hosting a special presentation this Saturday, January 26, that’ll cover everything you need to know about this turning point… And how you can earn a fortune while most investors lose their shirts. Sign up right here.
Are you an investor or trader? Which do you believe is a better option for 2019?
And as always, send any other trading questions, suggestions, or stories to [email protected].