According to the WSJ this morning, it seems that the market corrects very soon.
July-Like Signals
Is a gathering toppiness indicating a selloff?
By MICHAEL SANTOLI
If the current environment becomes any more like July's, we're going to begin seeing Midwest heat waves and nightly highlights of Mark McGwire home runs again very soon.
Not only is the Dow Jones Industrial Average back at the doorstep of its all-time July 17 peak of 9337, but the statistical characteristics of the current run -- the foot- and thumbprints on this rally's birth certificate -- are remarkably close to those attached to the powerful spring and summer ascent.
The real stars of late have been the nonpareils of the Nasdaq, as they were a few months ago. Intel, Cisco Systems and MCI WorldCom all whistled to new highs last week. The Philadelphia Stock Exchange's OTC Prime Index -- a jet-fuel-powered basket of the 15 biggest and most-active Nasdaq issues that was launched in the heady days of early summer -- is actually at new highs that are 15% above mid-July levels.
Internet stocks are again defying gravity and traditional analytical techniques, piling on billions in market value by the day amid rabid demand, thin supply and intrepid, misguided short selling. To illustrate: Yahoo's November 200 call options -- which would've required a 15-point one-day surge in the stock to be worth anything -- were among the most active options traded Thursday. And the lemming school of stock-split investing was again in session, with Amazon.com vaulting 18% Friday on news of a 3-for-1 split.
The overall options market is similarly sending July-like signals. The Chicago Board Options Exchange's Volatility Index last week persisted in slouching lower, a sign that investors have gotten over the anxiety of recent months' ferocious market swings and thus aren't eager to pay much for index-options protection. This measure, which peaked out at a flabbergasting intraday high above 60 on October 8, has just completed three weeks below 30 for the first time since the period ended August 3. The VIX accelerated its decline late last week, falling more than 10% Friday alone to around 21. This isn't as low as the high-teens reading that marked the market's top in mid-July, but it's getting there.
For those with their ears to the rails of the market, these parallels may represent some danger to investors. The primary concern involves whether the strength and relative placidity of the stock and options markets are flashing a signal that investors have become too complacent for their own good, which could make stocks vulnerable to a nasty selloff. That would be the logical conclusion based on the tech-stock froth and low fear readings represented by the sleepy VIX.
But analysts from disparate disciplines say the risks may not be quite so acute, based mainly on a continued high put-call ratio -- a lone signal that year-end caution is keeping the market on decent footing. The higher the put-call ratio, the more healthy skepticism and latent buying strength the market exhibits.
Options strategist Larry McMillan's technical gauges have been registering an overbought market for a couple of weeks, but he says that without a drop in the put-call ratio to confirm this condition, he sees no sell signal.
And Bernie Schaeffer of Schaeffer's Investment Research likewise points to an S&P 100 index-option put-call ratio above 1.6-to-1 on several up days in the market as reason to stick with his contrarian bullish call in September. Schaeffer takes additional comfort in a new multi-year high in his open interest put-call ratio for the 30 Dow components.
With a market that has tacked 1,400 points on the Dow since October 8, that's a lot of weight for one little indicator to bear. But those still bullish in the face of what appears to be a gathering toppiness to the market had better keep a close eye on the ratio, just in case next month turns out to be another August.
Though not soon enough to catch the recent tech rally, the American Stock Exchange continues to inch toward the launch of a listed Nasdaq 100 index fund, akin to its popular Spyders. Susquehanna Investment Group has been selected to be the specialist for the product, exchange sources said last week.
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