Despite the rout in stocks that August and September experienced, the fear-of-missing-out (FOMO) is alive and well.
From low to high, the S&P 500 Index rallied eight plus percent between August 24 and September 17, followed by a seven-plus percent sell-off in the next eight sessions. The rally that followed tacked on six-plus percent in merely five sessions! A mecca for traders. Some level of short-covering probably played a role in the latest rally. As probably did buying from those that are afraid of missing out.
Seasonally, it is coming up on that time of year when stocks tend to do well. We are seeing early signs of market participants positioning for that. If they are right, there are tons of unwinding left to do in metrics like Charts 1 and 2.
Chart 1 below highlights the 21-day moving average for the CBOE equity put-to-call ratio and the ISEE index (all equity). The latter is inverted as it is a call-to-put ratio. The concept is simple. The higher the green line for instance, the higher the odds of a subsequent move to the other direction. Simple mean reversion at work. So from a contrarian perspective, the multi-year high in the green line should bode well for stocks. If it follows the traditional pattern, that is.
So far, both lines are trying hard to continue to head down, but struggling. Which way these indicators break will have a near-term impact on the stock market.
A similar struggle is portrayed in Chart 2 below. The green line is a ratio between the spot Volatility Index (VIX), which measures one-month volatility on the S&P 500, and the 3 month Volatility Index (VXV). During times of risk-off, demand for VIX exceeds that of VXV. Notice the spike on the right side of the chart. That was on August 24, when the ratio closed the session at 1.03, but rose as high as 1.33 intra-day, before stocks reversed. The ratio is currently dropping.
The VIX has been more than cut in half from the August 24th intra-day spike, having dropped below 20 for the first time in 30 sessions on Monday, and needs to continue to head lower if stocks are to continue to attract bids. For all that, it is approaching oversold conditions on a daily basis.
This will have implications for whether or not the FOMO crowd has it right or is just plain too early.
So far, as far as major U.S. indices are concerned the rally in stocks that began on September 30 has stopped right where it was supposed to. During the August-September sell-off, support levels got broken left and right, creating tons of overhead resistance in the process.
On the S&P 500, the nearest technical resistance – and an important one as it has not been exceeded since late August – lies at 1990ish, some 50 points before an even bigger one at 2040ish.
After a 3.3-percent two-day rally, the index closed Monday right underneath 1990 and digested in a sideways pattern Tuesday (see chart 3 below).
Come Tuesday, sellers showed up, though nothing serious yet. The 50-day moving average (1998.52), is still falling. The corresponding technical resistance on the SPDR S&P 500 ETF (SPY)Â lies at 198-199, with the 50-DMA at 199.27.
The S&P 500 is not alone in this behavior.
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