4 charts showing that Dow and S & P 500 are overheated, possible correction

As the Dow industrials shift into hyperdrive, a sense of agita is rising rapidly on Wall Street.

A number of analysts and strategists over the past few days are cautioning that worrisome trends are starting to crop up as equities take the escalator higher, pointing to a market that is getting overheated.

Blogger's at The Daily short and Market Watch reference CNN’s “fear and greed” index which shows that greed is at a roughly two-year high:

A higher level of greed can mean that the market may be assuming an all-too complacent posture, which would put it in a bad position to withstand a shock.

"Wall Street’s “fear gauge,” the CBOE Volatility Index and other measures of volatility are also being cited as demonstrating signs of overexuberance.

Prominent market technician Tom McClellan explains a very linear path for the index implies that the trend is likely to come to an end soon. And presently, his choppiness index is at its lowest level in two decades.

"Linear trends either upward or downward are very exhausting, requiring a lot of energy from either the bulls or the bears to keep everyone in formation and marching together. The market tends toward entropy, so excursions like this toward extreme organization cannot last for very long"-he adds

The upshot for McClellan, who maintains a fairly bullish intermediate and long-term outlook for stocks, is that things could snap lower soon.

Salil Methta, a graduate school finance professor, who has worked at Georgetown University and New York University, says the more Wall Street’s fear gauge retreats below 12 the higher probability that stocks will stumble. The VIX, which stands at 11.77, is around a near one-year low.

Mehta’s bar graph above indicates that at current levels, there is about a 20% probability (in blue) that the VIX goes any lower; and in fact, the market is more susceptible to tumbling.
Record highs for stocks can make investors nervous. The rapid, whipsaw action in stocks from sharp losses fueled by Brexit to the thin-oxygen levels of record altitudes has left a nagging sense of doubt for many investors.

John Kosar said although he isn’t seeing a long-term pullback in the cards for equities, he says the market is due for a retreat. Kosar cites the VIX and the Chicago Board Options Exchange put/call ratio, which is a measure of bullish and bearish bets on the market. As the following chart shows, Kosar believes that the 5-day moving average of the put/call ratio is showing signs that market is getting less bearish, which tends to precede a downturn.

To be sure, Wall Street watchers aren’t all waiting for the sky to fall, and some are even anticipating markets to make a power move higher yet. Meanwhile, Brian Reynolds, chief market strategist at New Albion Partners, makes the case that investors are scooping up protection against the possibility of a market stumble and that is driving prices higher in three-month VIX futures. VIX.

“Bearish investors are now paying over 50% more for three-month protection than they are for the spot VIX. That is an enormous premium to pay on the thought that things just have to go wrong,” Reynolds says.