Someone asked me today if I thought the morning dip was the "chance to buy." Someone else asked me near the close if I thought the rally was a "chance to sell." That is how much of a tug of war we have on our hands with this market.
For the majority of December and January, we were in a 100-point trading range on the S&P. The moves might have been short-lived and rather sharp, but at least the range was wide enough to make a difference. Then came the February breakout. It did not arrive until midway through the month. I am not even sure we can call it a breakout because we rallied 50 points and that was that. From a 100-point trading range, we should have rallied 100 points.
For the past two months, the trading range has gotten smaller and smaller; it's been more like 50 points. The smaller the range, the more complacent folks get. I have noted this before. The bulls feel as though nothing is going down enough to hurt them, or at least not enough to force them to sell. Heck, just look at the way Norfolk Southern (NSC) traded on Tuesday after that awful earnings miss. It was as though, if they didn't buy it right then and there, it would run away on them!
But the bears are complacent as well. They haven't seen a breakout to the upside, so why should they be scared? There is nothing that has made them feel they need to cover their shorts. Not yet, at least.
But the interesting part of all this is that it has started to show up in the put/call ratio of the VIX. You might recall we looked at this two weeks ago when the put/call ratio on the VIX sunk to 20%. At the time, I explained that this was a rather large bet on a higher VIX (a lower stock market) and if we used it as a contrary indicator then the market should tend to rally. So it has.
Tuesday's action, though, saw the other side of the VIX coin. The put/call ratio zoomed up over 100% for the first time since Feb. 26. This is a bet on a lower VIX, and therefore a higher stock market. In case you don't remember, Feb. 26 was the high in the S&P so far.
The previous readings over 100% were in January. I have used arrows on the S&P chart to show you the points in time when this ratio went over 100%. You can see the bet for a lower VIX and higher stock market did not pan out. Once again, it paid to be contrary.
What I find so fascinating in all this is that the longer this narrow range goes, the more willing folks are to make a bet -- a big bet, one large enough to skew these ratios --that we will not stay where we are but will move out of the range. And yet we can't seem to break out of it.
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