Commentary--Lawrence McMillan for 11/22/00...
optionstrategist.com
>>>Stock Market
Some fairly significant changes have occurred in the sentiment data, necessitating a change of strategy to a certain extent.
In essence, most of the broad market put-call ratios have risen to new highs or rolled over to sell signals. This has occurred with some of them at extremely high (oversold) levels. Such action is not typical of what we've seen over the past few years.
First and foremost, it means that we can't take bullish positions until these indicators confirm a buy signal by rolling over and heading down.
But perhaps more significant, this action looks more and more like what one expects to see during a BEAR MARKET: oversold conditions that generate only modest rallies, and then the market heads south again before it even gets overbought.
The weighted equity-only put-call ratio has risen to new highs, and is currently at the most extreme negative sentiment that we've recorded. One day last week there were $340 worth of puts traded for every $100 worth of calls. Still, we can't be bullish because the ratio is rising. A buy signal will only occur when it rolls over and heads lower.
The factor that is causing this is mostly the NASDAQ stocks. The NASD put-call ratio has risen to new highs. In doing so, it has exceeded the levels of the NYSE put-call ratio for the first time since we created this breakdown of the equity-only ratio. For once, there are more calls being traded on NYSE stocks than there are on NASD stocks (or, more likely there are more puts being traded on NASD stocks than there are on NYSE stocks).
In addition, the "normal" put-call ratio has not yet risen to new highs, but it is trending higher, which means that a new sell signal has been established.
Does this all mean that we should turn heavily bearish? No, it does not.
In fact, we have seen similar occasions (albeit at lower levels of sentiment) where the market goes through a second selloff (the first one was in October) and the put-call ratios go to new highs. This happened in each of the last two years.
Some of our other indicators are less bearish also. For example, both the S&P futures put-call ratios (normal and weighted) and both the NASDAQ-100 ($NDX) ratios, as well as the weighted $OEX ratio are all still on buy signals, albeit they could easily turn bearish just as the above charts did.
All of these buy signals occurred back in late October or early November, so they aren't what one would consider "fresh." Our oscillator remains ABOVE the 200 level. If it were to decline below there, we would become more concerned that it, too, was looking for a more extreme oversold condition.
What I find most worrisome is that these put-call ratios are all at such high levels, and that last summer's rally or the recent one at the beginning of November didn't really push the levels of sentiment down to the bottom of the above charts.
Perhaps I'm being overly worrisome. Maybe the next buy signal will turn out to be of an intermediate-term nature as I had originally expected.
However, recent action seems far too bearish considering how much negative sentiment surfaced in October, so I think it wise to be prepared for the "new sentiment," whereby everything is just more negative than it was during the big bull market where sentiment peaks at higher levels and troughs at higher levels, too.
I still expect a short-term rally to be generated by this current bout of negative sentiment. Perhaps it will be released when the Presidential election is finally decided (although I don't think that's what's causing the current selling; it may have gotten it started, but this negative sentiment is on a roll of its own right now).
We will buy the market when the indicators turn, but we will also be disciplined enough to sell out those longs when the time comes.<<< |
