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1987 and Now

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The similarities with 1987 are looking a little bit creepy, especially if the August high holds and we fail at these levels. Today would mark 27 trading days after the August high, almost the same length as in 1987 (28 trading days). So instead of an October event, this would be a September event. The S&P 500 (INDEXSP:.INX) 1685 area is key. ES tapped 1684 yesterday right when Obama started his speech, and it has come down modestly. However, one cannot say the same for NQ (NASDAQ-100 (INDEXNASDAQ:NDX) futures), which is taking some heat. That NQ lag started yesterday and is normally a bearish sign. What is even more troubling is the equity put-to-call ratio the past few days.

Here are the readings for the past 6 days in a row:

0.54, 0.54, 0.52, 0.5, 0.45, 0.48.

These are extremes in bullish sentiment, never mind the polls. Big upside bets are being put on by the smaller speculative crowd. Add NYSE margin debt exceeding what we saw in 2000 (chart courtesy Doug Short) and the potential cycle mentioned above, and the recipe for a strong bearish event is present.

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These bets are low odds, but this does not mean that a crash can't happen or that one should not remain vigilant. I would avoid buying stocks up here and would seriously consider lightening up or buying protection.

In terms of futures, I would pay close attention to NQ (September contract, we will move to December tomorrow). The line in the sand would be 3148.75, the scene of Monday's breakout and Friday's VAH (value area high, chart 2). The NASDAQ-100 would be the same since the September contract, which expires next week, is lined up with cash now.

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POSITION:  No positions in stocks mentioned.