Let's rewind to July 10. That's when, for the first time since mid-April, the put/call ratio for the Volatility Index jumped to triple digits. That was a big bet on a lower VIX (higher stocks). It seemed folks had been lulled into believing that the VIX, at 13, was going lower. (See the blue arrow on chart.) I suppose if you are a trend follower, it makes a lot of sense to bet on a lower VIX. But it's been a very long time since the VIX has gone under 12, and as you can see in 2019, it hasn't spent much time sub 13 either.
Fast forward to Friday -- eight trading days later -- and the VIX hit 14.45, likely making all those put options worthless. Would it surprise you that the total put/call ratio for all options jumped on Friday to 109%? That's the highest reading we've seen since it hit 113% on June 3 (see the green arrow on the VIX chart). In other words, Friday saw a definite shift away from complacency.
Turn in TRIN
We reached an overbought reading just about a week ago, and with breadth negative three of five days last week, we can tell there was quite a bit of selling in the market last week. The TRIN, or Trading Index, which is a ratio based on the advance/decline line coupled with up and down volume, tells us when it is over 2.0 selling is swamping buying. Those are typically exhaustive days in the market and they don't arrive that frequently.
But when the TRIN is over 1.0 for five straight days, it's not selling on capitulation, it's persistent. So we turn to the 10-day moving average of the TRIN. Typically when it gets over 1.2, we think of the market as oversold, because there has been enough persistent selling to take this indicator up there.
In the last year, this has occurred four times. In August of 2018 and March of this year the timing was lined up quite well as the S&P rallied nicely off those oversold readings.
In December and May, those peak readings arrived a few weeks prior to the low and all they gave us were short-term relief oversold rallies. For now, all it tells us is that the overbought reading worked as the market lost upside momentum and stocks got sold.
I still think we're in for some more volatility, but at least the complacency is getting wrung out.
Bank on a Bounce?
I have liked the banks for what seems like months. And quite frankly, they have not been very rewarding. But I noticed this weekend the ratio of the Bank Index to the S&P 500 is up against a downtrend line that has been in place since the beginning of the year.
In general, I don't think trend lines or patterns work well on ratio charts, but this one has seen it stop every outperforming rally, so it intrigues me. There was also a minor higher low in July vs. June, so I will be interested to see if this downtrend line can be crossed to see if the banks can change their under-performing trend.
Here are the charts for the overbought/oversold oscillators for Nasdaq and the New York Stock Exchange.