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Summer’s ‘Signs of Froth’ Return to Stock Market

Summer’s ‘Signs of Froth’ Return to Stock Market

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The New York Stock Exchange, as reflected in a puddle.


Michael Nagle/Bloomberg

Some warning signs are now re-emerging in the stock market similar to what happened in late August and early September, when the S&P 500 peaked and then experienced a roughly 10% correction.

The VIX and VXN fear gauges for the S&P 500 and Nasdaq Composite indexes, respectively, moved higher on Monday along with the two indexes, and the ratio of put option volume to call option volume fell.

An important ratio of put/call volume is down to 0.55, against an average of close to 0.8 in the past year, indicating a bullish stance among investors.

The S&P 500 closed up 1.6%, to 3,534, putting it within about 1% of its closing high of 3,580 set on Sept. 2. The Nasdaq ended up 2.6%, to 11,876. The S&P is up 9.5% year to date, and the Nasdaq is up 32.5%.

“U.S. equities are surging on light volume (again), and we are seeing some of the same ‘signs of froth’ emerging that we saw in early August,” Chris Murphy, co-head of derivative strategies at Susquehanna Financial Group, wrote in a note Monday. “This does not mean imminent downside, because as August showed the markets can remain frothy (low put/call ratio, stocks and volatility up, etc.) for a while, but this is something to watch.”

Murphy notes that it is unusual for the VIX and VXN to be higher in a session when major indexes are up sharply. The VIX was earlier on Monday up almost 2%, while the VXN was up more than 5%. Normally those fear gauges move lower when stocks rise. The last time a similar event happened was in late August and early September.

The

Proshares Ultra VIX Short-Term Futures

exchange-traded fund (ticker: UVXY), however,

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