New closing highs on Nasdaq, new closing highs on $SPX. New highs on $NYA. It all seems pretty straightforward: The autopilot program continues unabated. We’ve been highlighting the possibility of new highs with outlined upside targets recently (Circus Freak Show) yet remain firm in the view of downside risk building in the market.

Some people confuse a risk analysis with a trading position. I still get that a lot of that on twitter. It is true I trade a lot from the short side, but I also trade as frequently from the long side. It’s called trading after all and 2015 has been very much a trader’s market, especially if you can take advantage of both the up as well as the down moves. Our members know this of course, but on twitter one is easily labeled a permabear or permabull. It’s a common misconception, often rooted in bias.

We’ve been highly focused on a very flexible approach, but one that keeps a close eye on the downside. Tops are processes and not events and are never announced in advance, but rather are obvious only in hindsight.

A risk assessment then gives a perspective on where one is in the market cycle. In the year 2000 the topping process literally took months to resolve to the downside with new highs made in the process. Markets and Wall Street can give the wrong impression that things are well when in fact they are not.  Even at the end of 2007 Wall Street forecasts were still uniformly bullish projecting happy upside for 2008. No, Wall Street will never tell you to sell at tops, rather more likely they will do the opposite.

And that’s another misconception: New highs are always bullish and a low $VIX is bullish. Is this really so? The record suggests rather the opposite:

$SPX vs $VIX: Buying versus Selling Opportunities pic.twitter.com/iAiGGBIB17

— Northy (@NorthmanTrader) April 24, 2015

But here we are, the $VIX back into the 12 range and people are exceedingly bullish and Wall Street is telling you it’s all normal and there are no bubbles:

It’s unanimous on #CNBC pic.twitter.com/XsUrOS7hht — Northy (@NorthmanTrader) April 24, 2015

Standard script. So why do we see risk to the downside building?

Let’s start with another set of misconceptions: “This is a hated bull market”. “There are too many bears”. “Not enough people believe in this market”. The data sets very much say otherwise.

People are bullish, almost uniformly so. The latest survey from Barron’s:

That in itself is of course not a sell signal, but it is a powerful expression of sentiment. And who could blame them really? Stocks have not experienced a correction of any real sort since 2011 as buybacks and central banks are a steady source of higher prices and charts are bullish.

The $NYA has finally broken out to the upside after a consolidation period of almost a year:

Small caps have broken out to new record highs and keep steadily marching higher:

And the Nasdaq is running into the old highs again:

But right here the warning signs are mounting. For one you will note that the Nasdaq has once again wildly disconnected from its monthly middle Bollinger band. It can and has done this several times over the past few decades, but when it does, it invariably comes back and retests this area. It almost got there last October, but a true touch hasn’t occurred since 2012.

Friday’s Nasdaq’s highs were principally driven by 3 stocks only:

Race and chase seems to be the primary form price discovery here.

The next behemoth to report of course is $AAPL on Monday, but even $AAPL doesn’t look exactly oversold here:

Which brings us to another misconception: “This is a broad bull market”. It’s not, it’s a bull market in select issues.

Take a look at the underlying signals.

Friday’s $NYAD was atrocious:

And stocks above the 50 day moving average actually decreased:

And $NYMO has not expanded either:

And $BPSPX has lagged behind as well:

Not signs of an expanding market, in fact the data does not match the headlines.

Take the $DJIA, still below December highs:

And financials are entirely unimpressed by the Nasdaq party and have declined the invitation:

Another common misconception: “Volume doesn’t matter”. If you are a day trader that is very much true. When analyzing market structures however, it is very much relevant. The plain fact is: As markets print have printed higher prices buyers disappear and when they do, markets invariably risk experiencing some sort of air pocket. This has been the trend over the past year:

Friday’s volume was pretty much the lowest of 2015 for the $SPY.

All this spells caution. This doesn’t mean we can’t go higher. There’s another dovish Fed meeting this week after all and of course month end mark-ups and buybacks are coming back into play. No the upside continues to be a clear and present scenario and the autopilot’s upper trend line is certainly in purview with a current target of 2175 $SPX.

The question any trader has to ask themselves is this: How much further do I want to push the pedal here? And I really mean here:

$WLSH – No comment pic.twitter.com/mjiGxOsQbB

— Mella (@Mella_TA) April 23, 2015

As I’ve said publicly on stream, we closed remaining longs on Friday as the risk/reward assessment increasingly suggests risk for sudden downside. To summarize the main elements:

High bullishness by participants, low fear factor with weak internals at a time of very large upward disconnect from historical moving averages with a narrow set of stocks driving indices.

Nothing has broken yet and everything remains a trade, but the risk is building.

For more information about our trade philosophy or on how to become a member please visit the About and Membership pages.