Weekly Stock Market Commentary 2/4/2022

By Lawrence G. McMillan

The broad stock market had a very strong rally over the 4-day period, extending from January 28th through February 2nd. The oversold conditions that existed just prior to that were massive and part of the rally was a reaction to those conditions. In addition, there is a verified positive seasonality to the end of January, as mutual funds and other large institutions put cash to work. Both of those conditions aided the rally greatly, but they are no longer in effect. For now, the demarcation line between bear market and a possible reversion back to a bull market is the negative trendline show in blue in Figure 1.

Equity-only put-call ratios remain in extremely oversold territory (that is, very high on their charts in Figures 2 and 3), but they have not yet rolled over to buy signals. They will only turn to buy signals when they roll over and begin to trend downward.

Market breadth improved dramatically during that 4-day oversold rally, but the bottom line is that the breadth oscillators are in oversold territory, looking to generate a new buy signal soon.

The $VIX "spike peak" buy signal of Jan 24th is still in effect, but the fact that $VIX is above 20 is a concern for the longer-term forecast.

There are still plenty of cross-currents in this market, as well as elevated levels of realized and implied volatility. Our major guide, as usual, remains the $SPX chart, and it is bearish. However, we will trade all confirmed signals around it, and for the most part, those are buy signals, still emanating from that massive oversold condition of late January. There is an old saying that no one makes money in a bear market: the bulls lose because prices are falling in general, but the bears lose too because the reflex rallies are so strong. If the most recent rally was just an oversold reflex rally, one can see how that adage came to be.

This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.