One Chart That Shows Bears Hitting the Bricks

The equity-only put/call ratio has dropped off sharply this month. Here's what that means

Senior Vice President of Research
May 21, 2018 at 8:42 AM
facebook X logo linkedin

"If a pullback occurs this expiration week, bulls want to see support on the SPY come into play between $266.86 -- its 2017 close -- and the $270.43 level... there is the possibility that the 275 strike acts as a magnet, as sellers of the calls are forced to buy S&P futures to maintain a neutral position in a process called delta-hedge buying.. The risk this week is the SPY trading below the 272 and 275 strikes. In this instance, the longer it remains below these strikes, the more apt that long S&P futures positions at 272 and 275 are unwound, creating a modest headwind."
-- Monday Morning Outlook, May 14, 2018

With the SPDR S&P 500 ETF Trust's (SPY - 271.33) intraday high at $274.08 occurring on Monday of last week and its low on Tuesday at $270.03, the exchange-traded fund (ETF) designed to closely mimic the S&P 500 Index (SPX - 2,712.97) behaved much as we expected, from both a technical and options-related perspective.

I was surprised, given the SPY high occurred so early in the week, that the $275 level was not touched. But the Tuesday low was pretty much in line with expectations, as it occurred at a round level that coincides with the SPX 2,700 century mark, and less than half a point away from the March 21 Fed-day close of $270.43. Long-time readers of this commentary are fully aware that closing levels around the time of Federal Open Market Committee (FOMC) meetings tend to act as resistance in the immediate aftermath of a rate hike, while decisions to hold rates steady have been more bullish from a short-term perspective.

Whether you are focusing on post-FOMC resistance at $270.43 or the triangle/trendline on most technicians' screens that connects the January and March highs and February-May lows, bulls should remain encouraged by the SPY price action since early May, which marked the beginning of a weak seasonal period for equities.

If you move outside the large-cap spectrum and into the small-cap spectrum, bulls should also be encouraged by the fact that the Russell 2000 Index (RUT - 1,626.63) took out its January all-time closing high at 1,610, which coincides with a round 10% above the February closing low, to notch another new all-time high.

rut daily at record high

"One scenario is the SPY rallying into mid-June and testing the mid-March highs at $280... Currently, fed funds futures players are factoring in a 100% probability of a rate hike on June 13. If the market rallies into this meeting, I could see a scenario in which the sentiment landscape is not nearly as negative relative to that which preceded the May 2 FOMC meeting. In other words, market participants could become more comfortable with stocks on the eve of a June rate hike, which has tended to precede weakness in stocks the following month."
-- Monday Morning Outlook, May 14, 2018

While the RUT made new highs last week, not much changed with the SPY, as it traded slightly lower on the week. After a promising Monday, stocks opened lower on Tuesday due to surging 10-year Treasury yields that surpassed the late-April highs. I think the unwinding of long S&P futures positions associated with the heavy overhead calls at the 272 and 275 strikes likely dampened the SPY's ability to mount a significant rally for the balance of the week.

spy daily with fomc meetings

With May options expiration behind us, and sentiment growing more optimistic after the technical breakout last week, the scenario excerpted above from last week's commentary is still a possibility. In fact, the graph below might be one of the better illustrations of the manner in which negative sentiment is unwinding, as the 10-day equity-only, buy-to-open put/call volume ratio is already below 0.50 after peaking at 0.65, a multi-month high, just one day after the May 2 FOMC meeting.

equity only bto ratio may 2018

The declining ratio is supportive of stocks as pessimism is unwound. Moreover, there is the possibility that the ratio bounces around at previous lows into the next FOMC meeting in mid-June. While the relatively low reading is a risk to the bullish case at present, I think it becomes a bigger risk if such optimism is on display ahead of the mid-June FOMC meeting, when it is likely the Fed raises rates again.

But keep in mind that FOMC minutes from the last meeting are set to be released on Wednesday. If there is anything in the minutes that surprises the Street, this could be enough to halt the current rally and generate choppy trading activity into the June meeting.

Remember, the stock market has tended to struggle in the four weeks following a rate hike during the current tightening cycle. And if short-term market participants are enthusiastic prior to a rate hike, it could spell short-term trouble for stocks beginning in mid-June. And it was this same group of speculators that was pessimistic prior to the Fed holding rates steady, even though the following four weeks have generally been bullish after the Fed holds rates steady.

Continue reading:


Target Effortless Triple-Digit Gains Every Sunday Evening For Life!

This is your chance to triple your profit potential on Sunday evenings, without spending all your free time watching the market.

On Sundays, as a Weekend Plus subscriber, you’ll get up to 6 trades every Sunday, each targeting gains of 200% or more.

Start targeting gains like the ones our subscribers have seen recently, including:

213.3% GAIN on AutoNation calls
100.0% GAIN on Monster Beverage calls
100.4% GAIN on Walgreens Boots Alliance puts
100.4% GAIN on ON Semiconductor calls
257.7% GAIN on Dell calls

101.0% GAIN on Apollo Global Management calls
103.6% GAIN on JP Morgan  Chase calls
105.3% GAIN on DraftKings calls
101.3% GAIN on Airbnb calls
203.0% GAIN on Shopify calls
102.0% GAIN on Cboe Global Markets calls
100.9% GAIN on Boeing calls
102.1% GAIN on Microsoft puts
102.3% GAIN on First Solar calls
101.5% GAIN on PulteGroup calls
101.0% GAIN on Apple calls
209.4% GAIN on NXP Semiconductors calls
100.8% GAIN on Uber Technologies calls
100.4% GAIN on Academy Sports and Outdoors puts
102.2% GAIN on Trade Desk calls
100.8% GAIN on DoorDash calls
100.0% GAIN on Camping World Holdings puts
100.0% GAIN on Cboe Global Markets calls
100.2% GAIN on calls
238.5% GAIN on Oracle calls



Rainmaker Ads CGI