Stock Market
Option Strategist
The buy signals that were generated in late December continue to hold and mature. Both the normal and weighted equity-only put-call ratios continue to decline from their December peaks. As long as they are declining, the buy signals will remain in effect. These signals are confirmed by the breakdown of the "normal" equity-only figures into its NYSE and NASD components, although the NASD line looks like it's wavering.
Other broad market measures of sentiment are falling into line as well: the $OEX weighted put-call ratio and the S&P 500 futures weighted put-call ratio are both on buy signals. Moreover, the S&P "normal" ratio is quite oversold and is thus nearing a buy as well. The only broad market put-call ratios that are not joining in the party are the QQQ ratios and the NASDAQ-100 ($NDX) ratios. In recent weeks, as NASDAQ stocks have gotten smashed, there has been a great deal of call volume. I doubt if it's bottom fishing (which would be a negative interpretation); rather, I suspect that there has been massive call writing especially by institutions as the call option premiums on NASDAQ stocks have ballooned in the wake of their negative stock price action.
Market breadth has been nothing short of terrific. That affects our oscillator, of course, and the oscillator has pushed upward to what ostensibly are very overbought levels even closing above +400 on a couple of recent days! On the surface you might recoil, thinking that the market is due to take a beating if we're so overbought. However, looking at history, we find that when the market is this overbought (in terms of the oscillator) and it's just beginning to rally out of a fairly nasty decline, then the overbought readings are bullish. That is, emerging bull markets are overbought initially and may remain that way for quite some time.
Finally, there is volatility to consider. Frankly, you don't need to be told that this market is volatile. I expect it to remain that way. It has essentially been very volatile since 1996. As this expected bull move unfolds, it would be normal for implied volatility to decrease somewhat and the fact that it hasn't is just a teeny bit disconcerting. Right now, it's not a big problem, but if $VIX stubbornly remains high, that's probably not a good sign. |
