Have you noticed how choppy the market is?
We gapped up on Monday and have been doing the sideways shuffle ever since then. Now everyone seems to think we get a big move when Fed Chair Jerome Powell speaks at Jackson Hole, Wyoming on Friday morning.
It's possible we do get a big move. It is even possible whatever he says disappoints market participants. If we take that extreme reading in the put/call ratio from Wednesday as telling us what the market is thinking, we'd say it's expecting some downside, wouldn't we?
I know many would like to rationalize that extreme reading. Heck, so would I. But I want to share a story with you. Back in December 2007, we had a total put/call ratio of 63% followed the next day by a reading of 57%. That's really low (and thus should be considered bearish for stocks). The equity put/call ratio on the first day was 39%. Yes, that low.
I was certain that these had to be "one offs." After all, it wasn't just a quadruple expiration, it was also the last one of the year. I rationalized it away. And I was wrong to do so, as we now know. So, when you hear me say I don't like to rationalize an indicator, I hope you can understand why.
With that in mind, let's get back to Thursday's options readings, because there was more of what we saw on Wednesday. The equity put/call ratio was 74%. For a day the markets were flat as a pancake.
The put/call ratio for the Volatility Index was 18%, so it fell under 20% for the first time since late July.
The equity reading says folks were leaning on the put side a bit aggressively. The VIX reading says they are banking on a higher VIX (lower stocks). Often when we get a low reading like this for the VIX, I consider it a contrarian indicator and therefore I think we should look for the VIX to go down and stocks to go up. That is unless we get multiple days with such low readings as we did in late July.
So what if we do come back down? Heck, that's my scenario (no, I haven't forgotten about it). Stepping away from the options ratios, the weekly survey from American Association of Individual Investors (AAII) showed a minor uptick in bulls and downtick in bears, nothing extreme. But the four-week moving average of bears ticked up. It is now at 39%, the same level it was at in late May.
One week from now, this moving average for the bears will drop 24%, so unless we surge upwards in the next week to get a massive move toward bullishness, I expect this indicator to peak next week. And peaks in this indicator tend to tell us there is too much bearishness around and they tend to show up at or near market lows.
All I know is all the chop seems to have folks on edge this week; at least that's the way the statistics read.