There’s panic in the air, and “blood in the streets.”
Financial assets are getting crushed.
The S&P 500 is down more than 10% so far in 2022. Treasury bonds are down 18%. Bitcoin has lost 14%. And Cathie Wood’s ARK Innovation Fund (ARKK) – the most widely touted exchange-traded fund (ETF) of the past two years – is down 45%, giving up all of its gains since 2019.
Folks are bearish… The American Association of Individual Investors (AAII) reported last week that the percentage of survey respondents looking for a rally in stocks over the next six months was just 19%.
Those looking for a decline topped 43%. That’s the lowest percentage of bulls, and nearly the highest percentage of bears, in two years.
That means we’re probably not far away from the start of a rally…
Investor sentiment is a contrary indicator. When everyone else is bullish, it’s usually a good time to be cautious. And often, the best time to put money to work is when everyone else is bearish.
Many folks turned super bearish on Friday. So bearish in fact, that the CBOE put/call ratio (CPC) spiked to its highest level since the stock market meltdown that kicked off 2022.
Let’s look at this CPC chart…
The CPC is a short-term contrary indicator. It compares the volume in call options to the volume in put options.
A reading below 0.80 (red line) shows extreme bullishness – meaning folks are buying a lot more calls than puts. A reading above 1.20 (blue line) shows extreme bearishness as speculators jump over each other to buy puts.
Friday was the second time in two years that the CPC jumped above 1.20.
Nobody was “buying the dip” on Friday… Most folks were buying puts and betting on even more downside in the days ahead.
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Of course, anything can happen. Maybe those put buyers will be right, and the financial markets will continue to get crushed this week.
But the stock market typically doesn’t reward the popular trade. It certainly didn’t reward the put buyers back in January. Stocks started to rally the very next day after the CPC hit above 1.20. The S&P 500 was 300 points higher just one week later.
To add more fuel to the potential rally fire, the Volatility Index (VIX) is on the verge of generating a broad stock market buy signal.
The VIX closed above its upper Bollinger Band last Friday. It’ll trigger a new buy signal when it closes back inside the bands. That could happen as early as today.
It seems like the market is near the end of this decline phase. Traders should be buying into any weakness early this week.
Best regards and good trading,
Jeff Clark
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