As the stock market continues to climb higher, investors are becoming increasingly concerned about a potential pullback. While no one can predict the future with certainty, there are several charts that suggest a pullback may be imminent.
1. The Shiller PE Ratio
The Shiller PE ratio, also known as the cyclically adjusted price-to-earnings ratio (CAPE), is a popular valuation metric that compares the current price of the S&P 500 to the average inflation-adjusted earnings over the past 10 years. This ratio is currently at 37.9, which is well above its historical average of 16.8. In fact, the only time the ratio has been higher was during the dot-com bubble in the late 1990s and early 2000s. This suggests that stocks are significantly overvalued and due for a correction.
2. The Put/Call Ratio
The put/call ratio is a sentiment indicator that measures the number of put options (which bet on a stock going down) versus call options (which bet on a stock going up) being traded on the options market. When the ratio is high, it suggests that investors are bearish and expect the market to decline. Currently, the put/call ratio is at its lowest level since 2000, which indicates that investors are extremely bullish and complacent. This is often a contrarian signal that a pullback may be on the horizon.
3. The VIX
The VIX, also known as the “fear index,” is a measure of the market’s expectation of volatility over the next 30 days. When the VIX is low, it suggests that investors are not expecting much volatility and are therefore complacent. Currently, the VIX is hovering around 16, which is well below its long-term average of 20. This indicates that investors are not pricing in much risk and are therefore vulnerable to a sudden market downturn.
In conclusion, while no one can predict the future with certainty, these three charts suggest that a pullback may be imminent. Investors should be cautious and consider taking steps to protect their portfolios, such as diversifying their holdings and holding cash reserves. By being prepared for a potential downturn, investors can weather the storm and come out ahead in the long run.