Significant stock market correction imminent?

[Tesseract]

Feeling a little uneasy about the US stock market, thought I’d share my thoughts.

While I feel the bull market has been justified qualitatively, it has, in my opinion, gotten out of control, thanks in large part to huge capital injections by banks that are flush with Fed cash.

This is what has happened in the last few days though:

Massive amounts of SPY puts have been bought at at-the-money strikes. Whoever is buying these believes the market will fall soon (within a few weeks).

Reports are also coming out of large numbers of out-of-the-money strike VIX calls being bought. Whoever is buying these also makes money if the market falls. The out-of-the-money strike implies that the purchaser is expecting a rather large market fall, probably > 10 %. This would have to happen by mid-march. It’s worth mentioning that for every buyer there is a seller, who thinks that these things won’t materialise.

Earlier in the year, there was a thread on Avalon, linking to a well-publicised article, about large VIX options transactions implying an imminent market fall – I analysed this and came to the conclusion that the transactions actually were being used as a hedge and the person responsible was actually betting on a market rally, which is precisely what transpired. However, this latest round of VIX calls are so incredibly far out of the money they reek more of ‘lottery’ calls than they do of a hedge strategy. Additionally, it makes far more sense to be betting on a correction at the current moment, given the near drug-like euphoria the market, and market commentators, have been in recently.

Tonight Ben Bernanke gave a speech, which I watched (not something I am in the habit of doing), but it was actually a great educational speech. What shocked me was that he made it very clear (to me, at least) that QE was likely to be cut back quite soon given the steady improvements in the labour force. As I write, the media is seemingly pretending he didn’t mention this, they are instead focussing on his interest rate comments (he said they can stay low for a very long time, not to be dictated by employment etc). I watched SPY (S&P 500 ETF) futures drop somewhat as he gave his speech.

So, we’re in for some interesting days. What do I think? I think the market will indeed drop by at least 5 % and as much as 15 % over the coming weeks.

[Conchis]

Well, we're at record highs (and have been running record after record for a while)... most of the corporate reports have beaten estimates ( I don't know how for the life of me)... I don't know how we're where we are, much less how it could do anything but fall. The money makers out there though like volatility. More volatility more money.....big highs and big lows make the very most for them and this market has been the product of manipulation for years in my opinion. So...it stands to reason, it's one big pump and dump over and over and over....

[mgray]

Equities have made a huge run and are susceptible to bubbles.
The adults in the room though are talking tough. Bond prices are falling as the far larger debt market is looking to make Uncle Ben/Aunt Janet show some of their cards before Bernanke leaves.
Should 10-yr Treasury approach 3% in next few weeks, then I think will see stocks give back majority of this year's gains around 15%.

[gripreaper]

Sure feels and looks like a blowoff top here to me, although the insanity can go on far longer as the shorts get squeezed. All QE has been factored in though.

[parcival]

Markets are going even higher.

Soon, deposits in USA will be zero...very bullish for stock market. The stock markets are the elites' playground. Join the ride and try not to fight the Fed.