Reference was made in Friday's Weekly Commentary to the fact that the weighted put-call ratio is at its lowest levels since November 2014. The long-term weighted put-call ratio chart – dating back to 1998 – is shown in Figure 5. In the 2002 bear market, the readings were astronomical, but since then, the ratio has ranged roughly from 50 to 130, except for some very bearish markets. The lows have slowly crept higher over the years, which is understandable, as more people have come to rely on put buying as a routine “insurance policy.”
Stocks finally suffered a breakdown of sorts this week, after some extremely overbought conditions -- particularly in volatility -- had appeared. But the bulls are trying mightily to contain the damage, and they look they're doing it quickly.
At this point, $SPX remains within the trading range that was delineated by the March highs and lows (2322 - 2401). Very little damage has been done to the $SPX chart. It remains in a neutral state.
For some time, we have been waiting to see if $SPX can break out on the upside. A breakout has not occurred, despite marginal new all-time closing highs (by pennies) for $SPX.
In reality, $SPX remains trapped within not one, but two trading ranges. The first range is the larger one -- comprised essentially of the March highs and lows, 2322 to 2401. Within that range, there is an even tighter range at play: 2380 to 2400. Because of these trading ranges, the $SPX chart is neutral.
In a move which some might call a “day late and a dollar short,” there are now going to be some products via which European volatility can be traded in the U.S. markets. There have long been volatility futures on the “European $VIX” – VSTOXX. VSTOXX measures the implied volatility of the European EURO STOXX 50 Index, using the same methodology that $VIX does.
As you certainly recall, after "Frexit," $SPX broke out strongly to the upside gapping up on two consecutive days (something that is quite unusual for a large-cap index). However, since then it has virtually gone nowhere. As $SPX has hunkered down in this tight band, some technical deterioration has appeared.
The stock market had a very favorable reaction to the French election. From a technical analysis standpoint, the move also brought in buyers, since $SPX broke upwards out of the pennant that had formed on its chart (red lines in Figure 1). But $SPX has not made new all-time highs, despite many of the small-cap indicies doing so. A cynic might say that $SPX is still in a trading range between 2322 and 2401 until proven otherwise.
Stocks (as measured by the $SPX Index) have had plenty of chances to collapse or to rally to new highs. Instead they have done neither, frustrating both bulls and bears.
In looking at the $SPX chart, two things stand out to me: 1) there is still a downtrend in place, from the all-time highs on March 1st, and 2) the support level at 2322 remains untested and thus is important.
Some deeply mixed signals have arisen in the last week. The basic chart of $SPX remains in its frustrating trading range, while breadth and put-call ratios generate mixed signals. However, $VIX has broken out to the upside, and that has generated some usually reliable sell signals.SPX continues to remain within the bounds of the March price range -- support at 2322 on the downside and ultimate resistance at 2400 (the all-time highs) on the upside.
Stocks (as measured by the $SPX Index) have had plenty of chances to collapse or to rally to new highs. Instead they have done neither, frustrating both bulls and bears.
