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SP500 - the beginning of the end

The behaviour of the US SP500 index is changing and could mean a huge move is on the cards.

The chart above shows the daily action since the beginning of the year. The redline at the bottom of the chart is the 21 day historic volatility (nb this is different to the VIX which measures implied volatility). This measure of market movement is at it's highest point for the year, suggesting the market is "heating up".

Secondly it's worth noting the manner of this rise in volatility. Previous highs this year were largely the result of a single day's fall. The historic volatility indicator spiked higher, then settled. This time volatility is climbing steadily - another change in market behaviour.

It's no secret that shorting the SP500 over the last two years has cost many traders their fortune.  Simply saying "it's gone too far, for too long" is not analysis. However this recent change in behaviour could be signalling the beginning of the end of the bull run. After adjusting for recent earnings upgrades the index PE is around 19x and close to highs not matched since the tech boom late last century.

It's easy to form the view that the SP500 is overvalued. However this has occurred before, and many traders will look for more evidence of an emerging downtrend before jumping into this "widowmaker" trade. For me that will be a close below the support/resistance level  at 2,406 With the heat in Washington rising over budget bills and the debt ceiling, this may be closer than many think.

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