Toppy Tuesday – Yet Again

If it's Tuesday we must be testing new highs.  

The S&P 500 finished the day at 2,399.38 to start the week and yes, we're still shorting below the 2,400 line on the /ES Futures (with tight stops above) because it's very rewarding if we get a pullback.  2,400 is a tough line to cross – it's up 200% from where we bottomed in 2009 and up 50% from the highs we made before the crash (1,600).  With almost all of the S&P 500 companies reporting, earnings are indeed up 13% over last year (weak comps, we crashed last year) but are they up 50% from 2006?  

Generally, the answer is no.  In 2006, the S&P 500 companies earned $98.47 per index share and the S&P topped out at 1,600 which was a p/e of 16.24.  Last year, the S&P 500 companies earned $95.48 and, even if we extrapolate a 13% bump to go through the entire year, that's just $107.89 and, at 2,400 – it comes out to a p/e of 22.24 so the market may be up 50%, but we're just paying 37% more for each Dollar of earnings.  I'm not sure that's really progress.  

Still, investor complacency has never been higher, as evidenced by the Volatility Index (VIX), which is back to it's pre-crash lows.  That makes long VIX an interesting hedge at this point and yes, that's been a terrible bet in general but that's what hedges are in a bull market and it's kind of hard to imagine how investors can be any more complacent (VIX is 9.59 this morning) while there's plenty of evidence of it spiking over 20 – even in this downturn and we were in the 60s during the crash.

The VIX has an ultra long ETF (SVXY) that makes for a fun short because it's up over 100% since November and the VIX is down from 20 to 10 and that would be fine, if it wasn't an ultra.  As it's SUPPOSED to be a 2x ultra, it should be up 200% and the lack of movement indicates it's subject to a lot of decay (usually from churn and fees) and that works very much to the advantage…
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