News Does Not Drive The Market. Human Emotion Does
It is a waste of time to try and assign cause to moves in the market. Market systems are both complex and chaotic; complex because there are so many variables, and chaotic because, even if we understood how all the variables interact (which we do not), we can never know the initial conditions of all the variables. This makes the market look chaotic.
News, geopolitical or financial, do not correlate consistently with market moves; sometimes, bad news has a positive effect, and good news can have a detrimental effect. News simply does not matter! The only consistent factor is the emotion of fear...fear of losing...and fear of missing-out (greed). That never changes. Human emotions leave repetitive patterns in the market's price history. We need to find these patterns and listen to what they are saying.
(While ‘news’ is not very useful when trying to gauge the probable future of the stock market, government fiscal-flows do affect the mood and direction of the market. But since we have already dealt with this variable elsewhere (see here), we will not be doing so in this piece.)
Sentiment-Based Patterns
AAII
With the AAII sentiment survey at only 37% bullish, there is little risk of a change to the market’s bullish primary-trend. Most markets do not top out until the bull sentiment is above 50% and the bear sentiment is below 30%. The requisite euphoria for a market top has not materialized (chart below).
Source: angtraders.com, stockcharts.com
NAAIM
The National Association of Active Investment Managers (NAAIM) exposure index 50-week MA leads market down-turns and lags market up-turns. It has flattened and is starting to move back up. This is a pattern that is seen at the start of market rallies, not at the end of them (chart below).
Source: angtraders.com, stockcharts.com
Put-to-Call Ratio
The put-to-call ratio has a strong negative correlation with the SPX (S&P 500); down-spikes in the 8-week MA indicate local market tops about 80% of the time, while up-spikes indicate local bottoms almost 100% of the time. Since December 2018, the 8-week MA has been steadily dropping and is at a level that has marked local tops in the SPX in the past. Even though the primary trend is bullish, pullbacks are inevitable.
Source: angtraders.com, stockcharts.com
PE:VIX
The price/earnings ratio of the S&P 500 in ratio to the volatility index (PE:VIX ) has a strong direct-correlation to the S&P 500; 85% of up-spikes in the ratio correspond with local market tops, while nearly 100% of down-spikes correspond with market lows. The PE:VIX ratio has made an up-spike which implies a local top in the SPX is at hand (chart below).
Source: angtraders.com, stockcharts.com
VIX
The volatility index (VIX), by itself, has a strong inverse correlation with the S&P 500; down-spikes in the VIX correlate with market highs. As we have been stating for several weeks now, the current VIX pattern has some potential to move up (SPX down) without changing the over-all bullish pattern. That bump in the VIX may have started this week (chart below).
Source: angtraders.com, stockcharts.com
Rydex Bear:Bull Asset Allocation Ratio
The bear-to-bull asset allocation of the Rydex family of funds has a strong inverse correlation with the SPX; a declining 36-week MA in the Rydex ratio is bullish for the SPX. Down-spikes in the ratio correspond with tops, and upspikes correspond with lows in the market.
In previous Weekly Summaries, we have pointed out that the Rydex nominal bear:bull asset ratio has formed an up-spike very similar to 2011 (green-rectangles in chart below).
Source: angtraders.com, stockcharts.com
In 2011, this up-spike marked the bottom of the -19% correction and a second up-spike shortly afterward marked a higher-low before the SPX rallied higher (chart below).
Source: angtraders.com, stockcharts.com
The same seems to be happening this time around; an initial spike higher in the Bear:bull ratio that marks the bottom of the -19% correction, and now a second spike may be forming as the SPX drops to a higher-low before rallying once again (chart below).
Source: angtraders.com, stockcharts.com
Despite all the news about rate inversions, corporate debt, and political instability, the sentiment-based patterns continue to confirm an on-going bullish primary-trend, even if a temporary pullback is a likely possibility in the near-term.