Weekly Stock Market Commentary 10/14/2022

By Lawrence G. McMillan

Stocks made new intraday and closing lows for the year again this week, and then the CPI number was released, causing a wave of selling and taking $SPX down to just below 3500. At that point, buyers who had laid in wait jumped in with heavy buy orders and unleashed one of the larger turnaround days in memory. $SPX moved from 3491 to 3685 in just a few hours of trading and gained most of that in less than one hour. So, we now have another oversold rally on our hands. Some of the previous ones have proven to be worth trading, but most have not. Typically, an oversold rally will fail at or just above the declining 20-day moving average, which is currently near 3700.

Make no mistake, though. Even if oversold conditions become buy signals and this proves to be a tradeable oversold rally, this is still a bear market, as denoted by the blue trend lines in Figure 1, and there is still the possibility that $SPX might go down and "tag" the lower trend line, which now would be a move to 3100 or even lower.

Equity-only put-call ratios moved higher this week, setting new highs for 2022 -- the highest levels that have been seen since March and April of 2020. Thus, they are very oversold, but buy signals have not yet been confirmed.

Breadth was poor on the way down, and both breadth oscillators are on sell signals. They are also deeply oversold. They will not generate buy signals until breadth is positive for at least two days, but their deeply oversold nature is contributing to this short- term rally as well.

$VIX remains something of an anomaly. It is still not reacting all that much to $SPX market movements, but that has happened before. In any case, $VIX remains in an uptrend, and that is bearish for stocks. That is, the trend of $VIX sell signal is still in place.

In summary, we continue to maintain a "core" bearish position and will do so as long as the trends of $SPX (downward) and $VIX (upward) are in place. Additionally, we will trade confirmed signals around that "core" bearish position.

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