Odds of a nasty correction are increasing

By Lawrence G. McMillan

The market continues to repeat itself with great frequency these days.  Once again, early selling was reversed, and now the market is trading near its highs for the days.  Breadth is only slightly positive (due to the weak opening), but even so the breadth oscillators are in deeply overbought territory.  $VIX rose initially, but is now down slightly on the day as well.  $VIX probably can’t fall much further, from a practical point of view, but the term structure of the $VIX futures is continuing to steepen today, adding to the overbought condition there as well. 

Guy on TV just said that a “slow grind” bull market makes people more comfortable than a volatile market does.   Perhaps.  But what you eventually get is a completely complacent populace and an extremely overbought condition.  So, when some catalyst sets off the selling, it quickly snowballs as everyone tries to head out the exit at the same time.  As a result, you get a very nasty correction, whereas a more normal one could have easily been accomplished in a more volatile market... 

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