It feels like everyone would like me to be bearish. For the last several days my inbox has been filled with, "but but but..." notes. I see all the negatives. Really I do. Interest rates. Tariffs. Profit margins squeezed from higher costs. The dollar. Have I missed any of the fundamental ones? The technical ones are obvious too: that looming resistance overhead.
I try and be objective about the market. If it leans too far one way I think it should go the other way. I realize it has been a long time since we've had a market that swings up and down but prior to zero interest rates we had a lot of that. Why can't we have it again?
If you want to be bearish then look no further than the put/call ratio for the VIX. Let me stop for a minute and note that I do not like rationalizing an indicator; it leads down a road best not traveled. But when there is an election that everyone is fussing so much over it makes sense that folks would use options to express a hedge.
A high put/call ratio is thought to be bullish because it's a lopsided bet that the underlying instrument is going down. The contrarian says, too many leaning one way so we should go the other way. Therefore a high put/call ratio for the VIX is a bet that volatility will come down. The contrarian says it's "bullish" for the VIX and a bullish move for the VIX is typically bearish for stocks. Thus a high put/call ratio for the VIX is typically short term bearish stocks.
Tuesday's reading for this ratio was 159%. It hasn't been this high since we had two readings in this range back in mid June. I have noted them on the chart of the S&P and they were bearish over the next two weeks But wait, there's more. We also had a very high reading in September 2017 (also noted on the chart) and it wasn't bearish in the least.
Then there is the upcoming overbought reading. Tuesday I noted that the "what if" for the McClellan Summation Index had reached an "overbought" reading. My own Oscillator will step into overbought territory late this week or early next week, so it's essentially almost there as well.
If we use the Nasdaq Momentum Indicator, which recently I have used to show the short-term "oversoldness" of the market, we see that it will be overbought on Friday. What I've done is walk Nasdaq up 200 points in the coming days and it the momentum indicator peaks on Friday. If we keep going up it will peak at a higher high.
Higher highs need to be retested (see the lower low on the chart from mid October was retested in late October). It's the same concept only inverted.
That's all the short-term reasons to think we can pull back.
But the intermediate term is still oversold. The McClellan Summation Index is still rising. The Hi-Lo Indicator has turned upward. And the Investors Intelligence Bulls slipped a bit this week to 42.5% so there is no complacency in the market.
I still think a pullback would lead to another rally.