A Time to Be Nervous

Index and Currency futures trader Jon Ogden emails:

As per your statement to tread carefully in the markets I'd say that's pretty good advice. What I'm seeing over the last two weeks has made me increasingly nervous; I never like to make crash calls because its usually just a way to make yourself look stupid but over the next 10 days I'll keep that possibility in the back of my mind.


Besides whats going on with the European fiscal and banking situation directly keep an eye on the EUR/JPY chart. It's what a lot of us use as a proxy for the carry and when it moves fast can set off a lot of sell programs in the market. Also look at the VIX - it has pulled back even as the market creeps back towards the lows, signaling complacency. The VIX is sitting in a clear breakout pattern. Over the last 2 weeks you've seen the market make some huge gaps down only to see it reverse and rally; this has warped trader psychology and made them quick to exit shorts and scared to hold into the gap, the result of which was what you saw friday where we gapped down and then ran another 25 S&P handles lower on relatively tame volume in both the es and on the NYSE; the markets amazing way of conditioning a certain behavior only to punish that behavior. Over the last 2 weeks the market has made longs complacent and not allowed shorts to stay short while we haven't been able to sustain any type of rally, just some range bound action and short covering above the low. Take a look at the NYSE chart (symbol: NYA) on a multi-year and 1yr basis, its one of the most bearish charts I've ever seen. The S&P, Dow, nasdaq and especially the Russell 2000 (the indices everyone looks at) are not as bad, creating a disconnect between the broad market(nyse) and the popular indices.

The major obstacle to a big sell-off is still a pretty high level of bearishness among the traders i talk to and observe, but in the rare instances that markets do crash they do so from an oversold position. With the market holding above the 1050 area on the es, vix consolidation, neutral put/call ratio, CNBC sentiment etc. one could make the case that not everyone is super bearish and there are still plenty of funds stuck long after chasing this rally that may have to start trimming positions if the 1000 area goes on the S&P. The other possibility which I find likely is we put in some type of false-break, reverse and rally through summer, surprising everyone and completely clearing shorts out of the market before we rollover again in the historical Sep-Oct crash period.