February 2018 was a very nasty month for stocks. For some time, we have been mentioning the similarities between current action and that of late 2017 and early 2018: a long rally has taken place, accelerating in January; there have been multiple failed mBB sell signals; put-call ratios are extremely overbought; new highs have completely dominated new lows, etc. And others are watching this as well. In late January 2018, a number of sell signals occurred almost all at once: there was an mBB sell signal, breadth oscillator sell signals, equity-onlyput-call ratio sell signals, VIX began to rise, and new lows exceeded new highs. All of these occurred on or before February 1st, 2018. By February 2nd, the market was collapsing and by February 9th, 2018 – in a matter of just 5 trading days – the entire rally of over four months had been wiped out.
So that’s we why continue to warn about complacency. You don’t have to try to pick the top of this market, but do not ignore sell signals when they occur. The accompanying chart, above, documents the period of time we’re referring to.
This article was featured in The Option Strategist Newsletter published on January 24th, 2020.