Two key indicators have reached extreme readings, which tend to precede shifts in the equity market trend.
Both the CBOE VIX indicator and the CBOE Put/Call Ratio have gapped well below moving average measures that have been useful as contrarian signals for short-term downside shift in equities. As can be seen in the chart below, a low reading in VIX vs. its moving average denotes short-term peaks in the S&P 500. We may be seeing one of those peaks following Tuesday's (January 24th) market close. Although this extreme reading indicator does not always pinpoint the day of a trend change, it is worth considering as a warning sign that the rally may be reaching its climax.
Another extreme indicator we follow is the TED Spread, or the spread between the 10-Year Treasury and Eurodollar futures. Peaks (or rises) in the TED spread tend to be an indicator of credit risk. While it does not appear evident that credit risk is seeping through the financial markets, the rise in the TED spread expresses expectations of risk that bears watching. Note in the chart below how the peaks displayed in the lower portion of the chart (blue portions of the oscillator) tend to precede equity declines.
Although the equity market indices are clearly bullish, extreme readings as such are cause for pause and reinforce the importance to preserve capital (and refrain from getting caught up in new high euphoria).