Mixed Indicators in the Stock Market: A Closer Look
Despite the general state of the stock market appearing to be in good health, taking a closer look at the indicators reveals some internal deterioration that has gone unnoticed earlier this year. This is particularly evident in breadth and put-call ratios, which give a bearish signal.
Volatility and Market Trends
The trend of the market and volatility levels indicate a bullish sign. The chart of the S&P 500 is still strongly positive with all of its significant moving averages rising, and the area of 1,950 provides strong support. As long as the low levels of the volatility indexes persist, the bullish trend will remain intact. It is essential to note the existence of a buy signal after a market sell-off, and volatility indexes spiked upwards before settling back down.
Breadth and Put-Call Ratios
Breadth has been relatively weak, with breadth indicators struggling to reach mildly overbought status, which is not what we want to see when a new upside leg begins. Cumulative breadth is a running total of daily advances minus declines. Whenever the S&P 500 index traded at a new all-time high, so did cumulative breadth throughout the year. However, there is a negative divergence when the S&P 500 trades at a new high, and cumulative breadth is significantly below its most recent peak. Most significant market tops are signaled by the decrease in breadth before the top, which lasts for a short or long period. This makes it essential to watch if cumulative breadth eventually returns to all-time highs, and if it doesn’t, time to become aggressively bearish.
Put-call ratios remain bearish, and they’ve been in that state for a while, indicating a bearish sign for stocks. Traders are buying puts as protection against a market decline, and that causes the put-call ratios to rise.
The indicators are relatively mixed, with breadth and put-call ratios providing bearish signals. However, any potential bearish sentiment can only be realized if support at 1,950 on the S&P 500 index is broken. It’s always important to watch closely for clear signals that indicate the right way to proceed.