Just a few short days ago, I noted that folks were rather cavalier about the big decline on Wednesday. Friday's decline seems to have made them think twice about that attitude. I have two reasons to believe that.
The first reason is anecdotal, but it goes hand-in-hand with a Twitter Poll I did on Saturday, asking what folks thought the direction of the next 100 points for the S&P would be, and 60% said down.
The last time my poll was that lopsided was mid-May, right before the market rallied. We also saw about 55% looking for the next 100 points to be up in early June and you can see how that worked out.
I have been away for a few weeks. I last ran a Saturday poll on June 6th when the majority had finally, after weeks, decided the next 100 SPX pts would be higher. pic.twitter.com/hBOu2Ikvh2— Helene Meisler (@hmeisler) June 27, 2020
The other reason is that Wednesday's equity put/call ratio barely jumped up, as it was 63%. Friday's was 74%, which you can see is the highest since early May. So yes, by Friday folks seemed to have had a change of heart.
The S&P is down 7% since the highs early in the month and as I noted, so many individual stocks are down more than 10% already. With the end of the quarter and the holiday-shortened week in front of us, I can make the case for a short-term rally. But considering where the other indicators are, I think we'd see the market retreat again after the holiday.
The indicators include (but are not limited to) the McClellan Summation Index heading down, the number of stocks making new lows heading up, the moving averages of the various put/call ratios, especially the 30 day moving average of the equity put/call ratio which is quite extreme.
I figure even my mother can see the S&P is at its 200-day moving average and that the 50-day moving average line is a mere 40 points below that. Yes, it's that obvious. But when it comes to moving averages, I like to look back to see what transpired so we might have a sense of what direction the moving average line might go.
Fifty trading days ago was mid-April. Two hundred trading days ago was mid-September. Let's start with September and the 200-day moving average first. The S&P was trading in the same place it is now: 3000.
But move your eyes forward a month and take a look at that multi-month romp the S&P enjoyed from mid October on. That means if the S&P cannot seriously lift up from here post the July 4 holiday the 200-day moving average will roll over. That's the math. If you replace 3200 with 3000, it just goes down.
Now look at mid-April (red arrow). The S&P went sideways just under 3000 for the next few weeks, but after mid-May it scampered up to 3200. That means by mid-July, the 50-day moving average is going to drop that ramp. Thus, no strong ramp up in mid-July and these very well watched moving average lines will roll over. Moving average lines that are heading down act as resistance whereas those that are heading up are easier to overcome.
It seems to me the reaction to second quarter earnings, when they are released in mid-July, will be important since the intermediate term indicators are not likely to get oversold that quickly.