The dominoes are all lined up. All it takes now is one drunk bull to stumble by and knock one over.
On Monday, we looked at why the third quarter of 2019 might be painful for investors. On Wednesday, we wrote about how that might start within the next week or so.
For today, I’d like to explain why a nasty correction could start by Monday – or maybe even today.
Take a look at this chart of the CBOE Put/Call ratio…
Regular readers will remember 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 closed at 0.77 on Wednesday – as the S&P 500 closed at a new all-time high and just a hair below 3,000. This is a short-term warning sign.
This is the third time the CPC closed below 0.80 over the past month. The previous two occurrences led to quick pullbacks in the stock market within two days.
So, we’re due for another quick pullback between now and Monday.
The problem now, though, is any sort of quick, short-term pullback at this point is going to trigger a broad stock market sell signal from the Volatility Index. VIX sell signals typically last anywhere from several days to several weeks.
And, that sort of action is likely to generate the sort of negative returns that usually occur during the third quarter of a year that starts off as hot as 2019 has been (like we covered in Monday’s Market Minute).
So… like I said… the dominoes are all lined up. All we need is a catalyst.
That catalyst might be today’s jobs report, or it might be something that happens over the weekend. Who knows?
I suspect, though, stock prices will be lower a few weeks from now than where they are today.
Best regards and good trading,
P.S. The questions for next Thursday’s live Q&A are pouring in. I’m impressed with how eager you all are to become traders… or simply to hone your trading skills.
In my career, I’ve been through a lot of booms and busts. And, it’s clear to me that we’re right on the cusp of the best trading environment since 2008. Anyone preparing now should do quite well.
If you haven’t submitted yet your questions for the Q&A, send them in right here. My team will send you more info on how to watch it next week.