Stocks Outlook - Friday, June 29

Thoughts

1. The Options Put/Call Ratio just spiked. A short term bullish sign for the stock market.
2. Sentiment suddenly became extremely bearish. A short term bullish sign.
3. Initial Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
4. Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.

1 am: The Total Put/Call Ratio just spiked. A short term bullish sign for the stock market.

The Total Put/Call Ratio just spiked to 1.32

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*The Total Put/Call Ratio combines equity and index (e.g. S&P, Russell, Dow, Nasdaq) options.

This suggests that the stock market’s short term potential downside is limited, and that the short term is becoming increasingly bullish.

The last 2 times the Put/Call Ratio reached this level were February 9 and March 23, both of which were short term bottoms in the stock market. Here’s the S&P 500.

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What’s also particularly interesting is that the stock market needs to fall less and less to achieve these bullish contrarian extremes.

1. The first time the S&P fell -11.8% for the Put/Call Ratio to exceed 1.3
2. The second time the S&P fell -7.7% for the Put/Call Ratio to exceed 1.3
3. The S&P has now fallen 3.5% for the Put/Call Ratio to exceed 1.3

I see this as a sign of medium term bullish price action.

1 am: Sentiment suddenly became extremely bearish. A short term bullish sign.

AAII Bears suddenly spiked to 40.8%. The last time this happened was April 12, right after the stock market had put in a short term bottom.

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As with the Put/Call Ratio, what surprises me is that the stock market only needed to fall a little this month (-3.5%) for sentiment to get so bearish. I see this as a short-medium term bullish sign in terms of price action.

1 am: Initial Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.

The latest reading for Initial Claims went up from the previous week’s reading (227k vs 218k). The key point is that Initial Claims are still trending lower right now.

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*Initial Claims lead the economy and stock market. Historically, its trends higher before a bear market in stocks started (see study).

This suggests that the bull market in stocks is not over because Initial Claims have not trended higher yet. HOWEVER, we are watching out for any SUSTAINED increase in this data series because Initial Claims are very low right now (historically speaking). We are trying to catch the bull market’s top because the bull market most likely only has 1-2 years left.

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This chart demonstrates the inverse correlation between the S&P 500 and Initial Claims. A downwards trending Initial Claims = medium-long term bullish for the stock market.

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1 am: Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.

Continued Claims went down a little bit from the previous week’s reading (1.705 million vs. 1.723 million). But the key point is that Continued Claims are still trending lower right now.

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Like Initial Claims, Continued Claims lead the stock market and economy.

This suggests that the bull market in stocks is not over because Continued Claims have not trended higher yet. HOWEVER, we are watching out for any SUSTAINED increase in this data series because Continued Claims are very low right now (historically speaking). We are trying to catch the bull market’s top because the bull market most likely only has 1-2 years left.

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This chart demonstrates the inverse correlation between the S&P 500 and Continued Claims. A downwards trending Continued Claims = medium-long term bullish for the stock market.

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Outlook

Here’s what I think will happen based on my discretionary outlook.

1. 2018 will trend higher but will also be a choppy year.
2. The S&P 500 has approximately 1-2 years left in this bull market.