The S&P500 is toying with the top of its 12 month trend channel. Last Friday was a “triple witching day” (when contracts for stock index futures, stock index options and stock options all expire on the same day). Friday’s markets saw a reversal from being up in the morning to a bearish close. Friday’s candlestick looks close enough to an “inverse hammer” (the precise definition would suggest no wick below the real body)- a potential sign of a market reversal. The massive volume and volatility was driven largely by the expiration of the above noted triple-witching phenomenon, so it may not be a true sign of trouble.
Research by www.sentimentrader.com shows that markets tend to remain weak during the week after a triple witching event–they’ve only been positive 7 of the past 21 occurrences. If we see too much weakness over the coming days, we may be bouncing off of the top of the aforementioned trend channel. Retracements within this channel have typically been in the 5% range to the bottom of the channel.
Adding fuel to the fire may be market excesses in low-quality IPO activity in the U.S., high investor margin levels, a high trailing PE ratio for the S&P500, and high volume by speculators. All of these indicators can be signs of an overly frothy market. While the trend remains up, there are some signs that things are getting ahead of themselves. While too early to make a major selling decision, I am keeping a close eye on things at this juncture. I have taken a little off of the table at this time, but remain 90% invested in the ValueTrend Equity Platform.