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By Jeff Clark, editor, Market Minute
Let’s try it again…
The past two Mondays, we took a look at the oversold conditions in the stock market, the sky-high put/call ratio, and the overwhelmingly bearish investor sentiment (a contrary indicator), and we figured the market was ready to put on a strong oversold bounce.
And, for each of the past two weeks, we got that bounce. But it was short-lived.
Stocks gave up their gains. And the S&P 500 finished the weeks lower than where it started.
Today, we’re looking at a similar situation to what we saw the past two Mondays. The stock market is oversold. The CBOE put/call ratio Is high. And investor sentiment is wildly bearish. So, yes, I’m looking for a bounce.
But there are a couple of minor, subtle differences to last Friday’s action that have me thinking a bounce this week could hold up.
Let me explain…
On the previous two Fridays, the stock market sold off hard. The selling pressure was constant during each of those sessions. And the selling intensified closer to the closing bell.
The S&P 500 closed on its lows on the previous two Fridays. Buyers weren’t willing to step up and add long exposure going into a weekend. And sellers took whatever they could get.
It was different last Friday… Despite stocks trending lower all day, buyers stepped up in the final thirty minutes of the session.
The S&P was trading at 4090 late Friday afternoon. It looked like we were setting up for another push lower to finish the week.
But then, for whatever reason, buyers showed up. The S&P 500 rallied 33 points in 30 minutes.
The market still closed lower on the day. But it closed well off of its lows. And that’s a big difference from what occurred the previous two weeks.
Another subtle, but important distinction, occurred in the Volatility Index (VIX)…
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The VIX usually moves counter to the market. In other words, when the market rallies the VIX falls. And, when the market falls, the VIX rallies.
Indeed, on the two previous Fridays, as the stock market fell, the VIX popped higher. But that changed last Friday.
The S&P 500 finished the session down 23 points. The VIX, however, fell too. It finished the session more than 3% below where it started.
Often, whenever the VIX falls along with the stock market, the stock market manages to recover in the days ahead.
None of this means we’re headed for a rip-roaring rally back to new all-time highs. That’s not likely to happen anytime soon.
But just as we were set up for a bounce last week, and the week before, we look set up for another one again this week.
And this time… it just might stick.
Best regards and good trading,
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Which way do you think the market will head next?