Category: Dr. Duke's Blog
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The markets are up over 14% since the election, and that's a huge run in anyone's book. So it isn't surprising that concern has been growing  that this rally has run too far, too quickly. We begin to think that there must be a correction lurking around the corner. Yesterday's strong decline across all of the major market indices brought out the "sky is falling" folks. SPX did decline $29 or 1.2%, so it wasn't a trivial down day. More troubling to me was the fact that the sell-off strengthened into the market close. There was no market rally to end an otherwise dismal day and give traders hope.

But today was a different day for traders. SPX opened at $2348, and closed at $2348, up $4 on the day. The small cap stocks, as represented by the Russell 2000 Index, didn't fare quite as well, but today's trading didn't extend yesterday's losses. RUT was essentially unchanged at $1346, down less than a dollar.

Both SPX and RUT have been trading in a sideways channel for about three weeks. Today's little mini-rally almost pulled SPX back to its support level at $2355. RUT was more successful, essentially closing at the support level held for the last few weeks.

Was today just a temporary pause before we go over the cliff? That is hard to answer with much certainty, but let's consider the evidence:

The trailing 12 month price to earning ratio for the S&P 500 is at record levels. We have to go back to 2009 to find higher numbers.

The CBOE SKEW ratio measures the demand for far out of the money put options. The thinking is that the large institutional traders will see the storm coming and buy protection. SKEW did reach very high levels this past Friday, at 153, higher than the first quarter correction of 2016 or the correction in the fall of 2014. But SKEW declined to 136 today, still moderately high, but not quite as scary.

I follow the volatility index for the S&P 500 (the ticker symbol is VIX). Normally we see VIX tracking steadily higher in the days just before a correction, but VIX has been pretty quiet. Even during the scary decline yesterday, the high of VIX was 12.9%, and VIX closed at 12.8% today. These remain historically low levels of volatility. During the market decline preceding the election last year, VIX hit a high of 23%. The big players aren't panicking just yet.

Where does that leave us? I think today's price action shows that the bulls remain firmly in control of this market. Traders remain optimistic about the future of our economy. Don't get me wrong. We should be cautious, but it would be premature to move largely to cash. It does raise an interesting question. Do you have trailing stops entered to protect those gains you have enjoyed since the election?