Are the markets doing a shake 'n' bake? Oh, you know what I mean. Each and every move in the market is shaking out weak holders. And I don't mean weak longs. I mean weak shorts, too.
Look at the action over the last week. Up nicely last Tuesday -- that was the first up day. Then we had a good rally going on Wednesday, only to give most of it back late in the day. So, we shook out shorts in the morning and longs in the afternoon. Then Thursday, we're up big again and everyone starts to get excited. So naturally Friday has no follow through, and down we go again.
Monday rolls around and we're up again. Tuesday we're down. Wednesday, we go down hard. Which puts the S&P right back where it was at the close last Wednesday. Had you slept through the last week, you'd think nothing has happened in the market because all it has done is shake out longs and shorts.
Now, everyone has their eyes on that gap down below (arrow on the chart). But I ask: What about the gap left overhead from Wednesday's action? Why must we fill the gap below? Why can't we fill the gap above instead? Because of the way the market has been doing this shake 'n' bake action, wouldn't no follow through to Wednesday's decline be more likely?
But let's talk about the number of stocks making new lows. It expanded on the NYSE to 116. But consider that on March 12, the day that we have thus far seen the peak for stocks making new lows at 2,377 the S&P was at 2,480, basically where we are now. At last Monday's low, there were 805 stocks making new lows.
It is possible if the S&P falls an additional 300 points, the number of stocks making new lows will exceed that peak reading from March 12 at 2,377, but I don't think that will happen. I think there will be fewer new lows.
This is a process, and this up and down action is part of it. Stocks can't find the right levels for real buyers or real sellers, unless they keep testing and probing and trying to force some discovery. That's what this action does. It tells us when the selling has dried up. It also tells us when the buying has dried up, too. And that takes time.
Imagine the market is like a person who has fallen down 10 flights of stairs. How likely is that person to get right back on that staircase and climb all 10 flights quickly? Not likely. There are broken bones. There are bruises. First you lift your leg to the first step, you test it, OK, maybe it feels good, so you try another.
But you will need rests along the way. At some point you will have over-exerted yourself and will fall back. You will have to wait for the broken bones to heal. That's the same process the market must go through. And there is simply no rushing it.
In the meantime, the put/call ratio was quite high again, but I was asked if I thought much of it was due to the very high put/call ratio for the Volatility Index. It could very well be that. But then I'd be rationalizing the indicator. To give you an idea of how much put buying there has been for the VIX, take a look at the 21-day moving average of the put/call ratio for the VIX. It has now exceeded the October 2011 high (red arrow).
October 2011 was a low in the market. The green arrow is September 2010, which was also a low in the market. Since it has been so long since we had such a peak and there are only a handful of instances, it's hard to make a solid case, but I can tell you this, I have learned that when the VIX options buyers are so persistent they have tended to be more right than wrong. Long time readers might recall the very low VIX put/call ratio from the summer of 2018 and we know what the fourth quarter of 2018 looked like. In other words, they are contrarian when it's one reading here or there but when they get this persistent, they have tended to be right.
Time will tell.