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 –