Two charts to pay heed off….

The blue lines on the chart below identify each point in history in which the following overvalued, overbought, overbullish, rising yields syndrome would have been observed:- S&P 500 overvalued with the Shiller P/E (the ratio of the S&P 500 to the 10-year average of inflation-adjusted earnings) greater than 18; overbought within 3% of its upper Bollinger band (2 standard deviations above the 20-period average) at daily, weekly, and monthly resolutions, more than 7% above its 52-week smoothing, and more than 50% above its 4-year low; overbullish with the 2-week average of advisory bullishness (Investors Intelligence) greater than 52% and bearishness below 28%; and yields rising with the 10-year Treasury bond yield higher than 6-months earlier. August 1929 can also be included, given that we can impute bullish/bearish sentiment with reasonable accuracy based on the size and volatility of prior market movements.

The market lost 85% between 1929-1932, lost over 50% between 1972-1974, crashed abruptly in 1987, lost over 50% in 2000-2002 and again between 2007-2009, and even lost nearly 20% in the less-memorable 2011 instance. This time may be different? I learnt 10 years ago that they are the mostly costly words you will ever hear..

Below is a chart of the short interest in the NYSE (overall market) relative to the S&P – almost back to 5 year lows and quite a reveral in the last 4 months – a period of course that has seen a large market rally. Yet another sign to be very careful. Most of the short covering is likely done and so a firm support for the market is dissipating before our eyes…

We are playing a potential downside move via options – essentialy a Calendar Put Spread with the intent to ratio it on a fall. Check out this guide to understand how these option strategies work –