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  1. Home
  2. / Investing

Why Volatility Could Pop in the Next Few Days

Sentiment indicators suggest stocks may be heading for a slide later this week.
By HELENE MEISLER
Aug 07, 2018 | 06:00 AM EDT

I did not think the S&P could make it back to 2850 so quickly. Clearly most stocks were not ready to participate either. If they were then Monday's trip back to 2850 would have seen more stocks making new highs instead of fewer as you can see from the chart below.

I can't even report that Nasdaq fared any better as there were fewer than 100 stocks making new highs there as well.

Speaking of Nasdaq, it has been green five consecutive days. I looked back and it hasn't done that since early May. Prior to that we saw Nasdaq go seven straight days in the green in early March. Oddly, in January we saw five and no more. Why do I point this out? Because sentiment for Nasdaq has shifted quite a bit.

The put/call ratios remain more neutral than anything else. For example. The total put/call ratio was 90% which is the high side of neutral. The Index put/call ratio was just under 100% which we haven't seen in ten days, just before the market took that recent 50-point tumble.

But it is the Daily Sentiment Index (DSI) from Monday that really caught my eye. First of all, the DSI for Nasdaq was 80. Usually something in the 90 area is extreme but the last time we saw Nasdaq at 80 was January 29th. I need not remind you that the ensuing days were difficult for stocks.

In conjunction with that the S&P saw the DSI at 82. Ten days ago, just before the recent 50 point decline we saw it at 86 so you know 82 is leaning high.

Then there is the DSI for the VIX at 8. That is low. Think of the inverse: it would mean 92 and as we have discussed above, over 90 is a red flag. Under 10 says we should look for a pop in the VIX.

Gold has seen many DSI readings under 10 and all of them have resulted in a 1-day pop and that was it. Gold's DSI was 8. This time the DSI for the dollar Index is 92. So it's possible the dollar pulls back and gold enjoys a pop.

If I had to take these 'stock market' DSI's and work them into what's going on in the market, I would note the lagging new highs and the extreme VIX reading and the 5-day winning streak for Nasdaq and it adds up to a likely pop in the VIX and a pullback in stocks later this week.

The statistics and indicators are not bearish, they are simply stuck in the middle of nowhere. Rallying hasn't changed them except for those daily sentiment moves.

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TAGS: Investing | U.S. Equity | Stocks

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