The main reasons are:

  1. Sentiment is extremely bearish
  2. The move is not yet confirmed in high yield credit, equal weighted indices, the S&P or the DJIA. The only index in a (slight) downtrend is the Nasdaq 100, which I think will probably revert back onto a buy before the rest go to a sell


Why the sudden change after so much bearish rhetoric over the past several weeks/months?

Aside from the previous two points, the current setup to me seems very similar to the lead in to the 1962 crash. So, I’m still very bearish just not tactically at the current moment. I don’t think there’s a ton of upside, either.

In 1961, the market ran way up into the end of the year with a massive rally into the very end of the year. After that, the market began to drop in January of 1962. But it didn’t immediately crash. Instead it dropped for all of January, pretty substantially, but then had a decent pop throughout February and March before finally caving in in the spring.

In thinking about that entire move, it strikes me that a similar type of market could get people wildly offsides in the current market. In other words, the max pain trade.

So what I’m looking for is a decent drop over the next few weeks that could take the S&P down to around 4490 or so making sentiment extremely cautious. I think the market could then reverse back up and have a nice, sustained rally for as much as two months, restoring calm and I would expect the VIX to come back comfortably below 15. At that point the market could reverse back lower and then the real drop begin. Convinced the prior drop was the correction, this next drop would be viewed as a buying opportunity.

This is weirdly specific, but it’s actually describing a head and shoulders pattern on the S&P, which is what happened in 1962. Whatever the case, I see a pretty weak market and I’m not really making any moves at this point until I get a better read.

I just think there are too many expecting a massive drop without a whole lot of confirmation from the market. I too believe a big drop is coming, but the timing isn’t right for it, yet.