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Time to Walk Instead of Run


Well, that doesn't look TOO bad...


On November 2nd, I highlighted several measures that have been good guides in the past as far as determining where the risk lies in the market versus potential reward.

At the time, based on where those measures were, and where they were coming from, we had a decent chance to see more gains in the weeks ahead. The rally we've seen surpassed my expectations and I was unable to take full advantage of it, but I don't want to try to "get even" by betting against a further rise just for spite.

Instead, let's take an objective look at where those same indicators are now to see if they're giving us any kind of a clue.

There are a couple of troubling signs among them, but nothing that's out-and-out frightful. The equity put/call ratio has remained relatively subdued, though that masks the behavior of the smallest of options traders. Last week, small traders bought to open nearly three times as many calls as puts, something that has previously coincided with at best a choppy market over the next month.

Our SPY Liquidity Premium has definitely recovered from the pessimism we saw a few weeks ago, and is now back at the upper end of its range. That tells us that investors have grown comfortable with owning individual equities and don't really see a need to "hide" in the safety of an ETF.

Assets in the leveraged bear funds at Rydex have nearly been cut in half since late October, and are now under $700 million. This is approaching the lows we have seen over the past couple of years, and is suggesting that those traders have increasingly been holding back on trying to predict an end to this advance.

Odd lot short sales have dried up, coming in about half of what we saw a few weeks ago. I wouldn't say these traders are overly optimistic at this point, just no longer pessimistic.

Overall, there are a few things I can point to that suggests being aggressive on the long side carries significantly more risk than it did a couple of weeks ago. That's common sense given the rally we've already seen, I suppose, but common sense doesn't always work on Wall Street. These measures are not in a place that suggests it's a high-odds proposition that the bull market is finished, only that perhaps it's time to walk instead of run.

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