I have been harping about the number of stocks making new lows. It has been my contention that there are far too many stocks making new lows for a market near its highs. If a rising tide is to lift all ships, it should not be sinking over 100 of them on Nasdaq. Yet that's what has been the case.
Last Thursday, we had the initial sign that the new lows were contracting when for the first time in two weeks Nasdaq's new lows shrunk to a still high 91. That was from 133 earlier in the week. Friday that happened again -- this time there were 84 new lows.
This is still too high, but considering that 10 days ago this reading began a string of triple digit readings, it means the 10-day moving average has stopped going up and is trying to roll over. This is the first positive news on this front in weeks.
Another positive sign has been the rising put/call ratio, which moved up with three readings over 100% last week. It has lifted the 10-day moving average, not enough for me to think we have fear in the market, but enough that one might think the complacency of a week ago is not as strong as it was.
But now comes the fly in the ointment: For three days last week the put/call ratio for the Volatility Index was over 100%. Remember, a high reading for the VIX put/call ratio means there are an awful lot of puts bought relative to calls, so it's a bet on a lower VIX (higher stocks).
It is unusual to get so many high readings within the course of five days. I took a look at this on a 21 day moving average and discovered some interesting tidbits:
First of all, the moving average doesn't get up to lofty levels very often and tends to do so during periods of extreme volatility. That makes sense. After all, it is folks betting that the VIX is unlikely to stay elevated in the upper teens or low 20s. Only now this high reading arrives with the VIX at 12 not 20.
During 2014 to 2016, we had five such high readings. Point A came after a 100 point plunge in the S&P. Point B was similar in that the S&P plunged about 100 points. Point C showed up after the August 2015 decline of 300 points in the S&P. Again, all of this makes sense, right?
Point D was only a 2% to 3% pullback, but you can actually see it lasted almost a month. So, again, that makes some sense. Point E was after the Brexit plunge and rally. Again, it's all very logical.
About six weeks after Brexit, in late July and early August, this moving average once again soared. That's the green arrow on the chart of the S&P below. So it arrived well after a period of volatility and then we had a relatively calm market --albeit one that went nowhere -- for a month before we began a slow decline of about 100 S&P points into the 2016 election.
Now look at the VIX from the same period. The blue arrows are the points D and E on the first chart, about a month before Brexit and directly after. The VIX had soared, so it made sense. The green arrow is when the moving average got so high in the summer of 2016. It was at 12, similar to now.
Perhaps they were correct, because they caught a move in the VIX to 11 from 14, but as you can see, within a month the VIX was over 20. So it doesn't make a lot of sense to bet on a much lower VIX, when it is at 12. And it's even more curious considering we've got elections in the U.K. in a few weeks, as well as that Dec. 15 tariff deadline for Chinese imports. The S&P, meanwhile, hasn't really budged in weeks.
When indicators get extreme with very little movement in the underlying index, I take note and stay alert to changes. That's what I'm going to do.