Stock Market Analysis

Tuesday, May 05, 2015

Is It Time For a Market Crash?

The US market took a beating today on multiple fronts; Trade deficit pointing to a potential lower revision of the already dismal first quarter GDP and Asian stocks taking a beating. All these reasons simply add on to the profit taking sentiment that is already in the market as evident by the significant selling pressure each time the S&P500 flirts with an all time high. Total equities put call ratio also surged into the bearish zone in favor of put options trading for the first time since 6 March.  (Learn about what put options are)

So, is this the start of a market crash?  Its after all 6 years since the end of the last market crash and the 2008 market crash took place 5 years after the end of the tech bubble crash.

From the looks of it, I don't think so at this point in time. There simply isn't enough evidence to convince me that this is a turning point yet. Bond yields have been rising the past few trading days even though the stock market has been dropping. This shows that real investors are still reallocating into equities from bonds and buying into the weakness from the traders who are taking profit and displaying strong short term bearishness (as evident from the total equities put call ratio). The single day surge in total equities put call ratio also isn't enough data to say that traders have turned bearish for real because the last time total equities put call ratio did this back in 6 March, it lasted only one day and immediately turned back down the next day, leading to a bottom in the market over the next few days that follows.(So did the time before that back in January) However, it is also evident that the market is now needing an intermediate correction in order to take a breather and set up for better entry points.

All in all, plenty of reasons to take short term profit and plenty of reasons to accumulate into the weakness depending on which side of the camp you are in now. Such is the typical sentiment of a toppy neutral market. This is also when smart traders wait for more evidence before taking action rather than try to predict which direction the next run would be. However, going by the fact that the market is still in an intermediate and primary bull trend, I maintain that the inclination for such a breakout would be bullish.

For now, the market turns short term neutral trend within an intermediate and primary bull trend.

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