Market Doesn't Play Politics for Long

 | Jul 12, 2017 | 6:00 AM EDT
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I want to begin with this notion that something political will take this market down. I realize that is what many believe. Back in January, I wrote an entire column where we looked at politics and presidents and the markets of the past. The conclusion was that the market cares about financial conditions, not politics.

For those who think "but Nixon," I ask you to have another look at that column. The Fed was hiking in 1973-74. We had an oil crisis in that time period as well. To me, Tuesday was a great example of everyone thinking "this is it" politically and the market cared for 10 minutes.

What is more important to me is that the Fed is removing the punch bowl. That could be the reason the Russell hasn't gone anywhere all year. That could be the reason the S&P is 1% higher than it was four months ago. But so far all this has done is keep the market going nowhere.

For some reason, though, options traders on the ISE exchange were incredibly one-sided on Tuesday. The call/put ratio was 216%. This is the inverse of the CBOE's put/call ratio. The ISE ratio rarely gets over 200%; in fact, it hasn't been over 200% since May 2015. You can see it on the chart. Please note that while we did correct after that, it was nearly three more months before that huge August decline.

In 2013, it was actually bullish for two weeks, not bearish. We had a big rally into year end and then collapsed in late January.

In 2012, we had two readings relatively close to each other. The September reading was a high. The December reading arrived on day one of the rally so we had one more up day and that was that; we corrected immediately.

2011's reading in mid-July is interesting because we did have one more up day, almost 1% to the upside, and then, as you can see, it was nothing but down after that.

Finally, I want to show you late 2010 and early 2011 because they were both very bullish. Prior to that, we had a reading on the exact low in March 2009. So prior to the summer of 2011 the high readings were bullish. Since then, the rallies -- if they arrived -- have tended to be very short-lived.

One final note: There was a high reading in late December 2008, which was also a high in the market, so it's not as though the indicator was different before 2011. This is why it is so curious.

Perhaps it was the political news that got folks so one-sided, or perhaps it's Fed Chair Janet Yellen's upcoming congressional testimony. Whatever it was, it was surely out of the ordinary, especially when you consider that the CBOE's put/call ratio was a relatively high reading of 106% (typically bullish for stocks).

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