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Pay Attention to the Put/Call Ratios

As sentiment goes, these bother me the most so far, and here’s why.

The Market

The indicators are mixed, as they have been for weeks. And for the last six weeks, the markets have been first in a correction and then back to the top of the range. For the S&P that’s 3000-3200. Let’s review some of the indicators.

We’ll begin with breadth. Let’s forget for a minute that Friday’s reading wasn’t very good. Instead, let’s step back and see what the cumulative advance/decline line looks like currently. It’s the red line on the chart. What we see is that the S&P (black) is back at the June high and breadth is at a lower high. Can it catch up? Sure, but thus far it hasn’t. Note that a similar situation developed at the February high (blue box) This goes in the negative divergence column.

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If we stay with breadth and move to the McClellan Summation Index, which tells us what the majority of stocks are doing, we see that despite the rally, these last three weeks (the S&P has rallied from 3000 to 3200 — black line) the Summation Index (red) has at best flattened out. The same thing happened in February (blue box). Like the breadth chart above, it can correct itself, but in this case it is going to take an awful lot to get this to a higher high. This goes in the negative divergence column.

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The number of stocks making new highs on the New York Stock Exchange is still rising, which is a positive. It is concerning that the S&P is within a few percentage points of the February high and the number of stocks making new highs is about a third of what they were then, but at least the 10-day moving average is not rolling over. I will call this neutral.

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Nasdaq’s new highs are in a similar situation, in that the trend has been upward since April with the 10-day moving average, but it is still far below the February readings, and even further under the January peak. The last week saw it move down, but the trend is still up. This is neutral.

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When it comes to breadth readings, meaning how widespread the rally is, I’d say it is not as widespread as it should be. I thought a week where the Russell outperformed Nasdaq (value over growth) would show more improvement in the indicators than we’ve seen, but it did not.

On the sentiment front, the put/call ratios are what bother me most. The equity put/call ratio has had exactly one reading over .50 in July. That means the 10-day moving average is at its lowest reading to date. It also means that any reading over .50 now will turn that 10-day moving average up. Moves to the upside in this indicator tend to come with pullback markets -- just look at the push up in June that came with a pullback in the market. Such a low reading tells us there is a lot of complacency out there.

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One put/call ratio that has not gotten terribly extreme yet is the 21-day moving average for the exchange-traded fund put/call ratio. Notice those two extremes under 1.0 on the chart. One came at the January 2018 high, and the other at the February 2020 high. The current reading is around 1.10, but the last three trading days have been below 1.0 and four of the last five have been below 1.0. What does all that mean? It means that if we continue with low readings for the next week, this could plop right under 1.0 in a hurry, since when you replace 1.40 with .90, the moving average falls quickly.

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Finally, let’s look at the Volatility Index. Some will fuss that it fell below the 200-day moving average on Friday. I wouldn’t fuss over that, but I would fuss over the DSI for the VIX falling to 12. This puts it within a stone’s throw from single digits and single digit readings in the VIX’s DSI have meant more volatility coming our way and often quickly.

That’s a wrap of some of the indicators. The charts of the major indexes are at resistance and not terribly bearish, except that they are at resistance, so they will need a good push upward to plow through those levels. But we know that a push up will take the DSI for the VIX to single digits, and we’d have to see if any of those breadth indicators could improve drastically in such a push.

I think something needs to shake the complacency. Last Monday’s reversal was a good way to do that but by Friday the complacency was back with us.

New Ideas

Once again I am going to do some follow ups.

Abbott Labs (ABT) - Get Free Report has been a chart I have liked for a few weeks, as it crossed that downtrend line. It had a good run last week, which has done two things: take it back to the old highs and complete the 90/100 rule (90% of the stocks that make it to 90 will make it to 100). I still like the chart, but I’d prefer to buy pullbacks near $95 now. The longer term target is around $108.

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Lumentum Holdings (LITE:Nasdaq) has done well, but in the last two weeks it pulled and rallied back to resistance (going nowhere). If it can ever get through these mid-80s highs, it gets better and should make a try for that old high in the low 90s.

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I warmed up to XLU (XLU) - Get Free Report a couple of weeks ago and it finally had a good week last week, but is now at resistance. I would not chase, but I do think the eventuality is that it crosses that line in the next few weeks. What I’d love to see is drawn in blue (thus I’d buy the test of the line)

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Today’s Indicator

The new highs are discussed above.

Q&A/Reader’s Feedback

Every time we have looked at Cisco (CSCO:Nasdaq) in the last few weeks, I have leaned positive and I still do. Now someone just needs to tell the stock it’s OK to rally. Up and over $48 would obviously improve the chart, but I think even if it did that, the resistance from that spike high at $49 would keep it in check on the first time up there.

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We also looked at Inseego (INSG:Nasdaq) recently and here, too, I was positively inclined. As long as it can stay over that $10.50 area, it should be OK. What I do not want to see is a pop and drop like it did a week ago, because too many of those and it turns bearish.

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Calix Networks (CALX) - Get Free Report is not my kind of chart, because it is up so much already. But it hasn’t done anything wrong and has an unfulfilled next target around $17.

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