Saturday, September 5, 2015
CPC and CPCE Put/Call Ratios and SPX S&P 500 Daily Charts Near-Term Bottom at Hand
The markets are a violent roller coaster ride each day since volatility is elevated and the VIX is near 30. Choppy markets chew up bulls and bears alike. There is elevated fear and panic in markets currently. Traders are wringing their hands worried about what is around the next corner. The mini-crash in Japan last week with the Nikkei Index losing over -7% has the attention of professional traders. You know what happens when fear is elevated and the CPC is high at 1.48 above 1.20 and the CPCE is elevated at 0.89 above 0.80. Yes, a near-term market bottom is at hand.
The first spike higher due to dramatic market selling occurred at the 8/24/15-ish date. As soon as fear and panic spiked to the uber high, Keystone said a robust rally would occur which happened. The expectation would be for the put/calls to drop towards complacency to wash out the fear and normalize trading, however, the put/calls would not retreat very far during the rally. As a previous missive pointed out, the CPCE dropped at the end of August to 0.66 which helped create a near-term top in stocks. Stocks began selling off again and tumbled lower late last week as fear grows over China, Japan, global deflation, the European migrant crisis and sluggish economic growth in the United States. The spike in the put/call ratio shows many traders seeking protection from the falling stock market buying puts sending the ratios higher.
Since the recovery in markets in late August did not create a proper amount of complacency (red circle), fear is running rampant with traders and the Japan breakdown last week increases the angst and worry. As soon as everyone jumps on one side of the boat, the other side of the boat is a better place to be. The charts above show that a rally is at hand and will begin any day ahead. The rally may be very robust gaining from 60 to 150 handles of upside. Once the upside gathers momentum, short traders will be running for their lives creating a short squeeze and sending stocks vertically higher. So it is prudent to bring on some long index plays for the rally ahead and would have been smart to buy some index calls late Friday. The stock market should begin rallying at any day forward and the rally should continue until the put/calls print inside the red circles in the right margins.
Can the stock market continue selling off? Sure it can but as it drops the fear and panic would be expected to increase further (higher CPC and CPCE put/calls) which only guarantees a near-term bottom for equities and long-side stock plays can be pursued more aggressively (when there is blood in the streets) for a trade. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.
Note Added 8:22 AM EST on Wednesday morning, 9/9/15: The stock market catapults higher as the above technical analysis explained. The CPC drops to 0.93 and CPCE to 0.66. The CPC likely needs to go sub 0.80 and CPCE sub 0.60 to verify that the bulk of the upside rally has run its course.