Commentary

By Cody Willard

Lets play if The Price Is Right!

Youve won the bidding round and now youre up to play the classic Cliffhanger Game  (How to play Cliff Hangers: Guess the price on three items. For each dollar you are higher or lower than the actual retail price, the climber moves up one space. If the climber has not fallen off after the last bid, you win!).

Do you think you can bet on the big stock market rally continuing and stopping just before the market makes its next significant pullback? Do you want to bet conservative and get/stay or with your bet on a pending big stock market pullback and risk going home with no prizes? Or maybe youre anticipating a a sideways, meandering stock market so youre only focused on getting into the later Showcase Showdown.

I asked everyone on WallStreetAllStars. on TradingWithCody. and on Marketwatch  who they think is more scared right now, the bulls or the bears. Heres what the studio audience thinks would be your scariest choice (heres how the poll results came out):

Bulls are more scared right now: 11

Bears are more scared right now: 69

Both are scared right now: 6

That is finally getting to be a pretty darn well-skewed enough majority to be somewhat of a meaningful indicator. Recall that when the bulls are overwhelming favored as being the most scared, it can be a great contrarian indicator that the market is ready to put in a big rally, usually from a weak bottoming action. And when the bears are polling as the more scared bunch, it can indicate that the market is topping and ready for a big-time pullback.

Ive seen this indicator flash 90% bulls and Ive seen it flash 90% bears and usually that kind of polling result is indeed followed by contrarian move. With the poll hitting an 80% Bears are more scared result, were pretty close to that overwhelming threshold. I think the markets are ready for a near-term pullback that could last longer and go further than most everybody thinks right now. Just exactly as this ongoing, but long-in-the-tooth, rally has lasted longer and gone further than most everybody thought it would.

Im going to add some SPDR S&P 500 ETF Trust /quotes/zigman/714403 /quotes/nls/spy SPY puts for protection here. Im also going to buy some calls on the CBOE Volatility Index /quotes/zigman/2766221 VIX. The VIX is a measure of the markets volatility, which means that if the market gets more volatile (and/or starts to pullback after a huge rally like weve seen), the VIX would theoretically spike. Heres a chart of the past years action in the VIX.

It can certainly fall further if the market continues to gently rally. But somehow I dont think itll be clear sailing for the next three months in the markets, in the economy, or in the volatility therein.

Cody Willard writes Revolution Investing for MarketWatch and posts the trades from his personal account at TradingWithCody.com. which is not affiliated with MarketWatch. At time of publication, Cody had no positions in the stocks mentioned. Follow Cody on Twitter at twitter.com/codywillard .