Investors Remain Fearful Despite The Market’s Recovery: What’s Next For Stocks

The stock market has recovered most of its decline in May. However, sentiment remains pessimistic. Thursday’s headlines:

  1. Sentiment is still pessimistic despite the stock market’s rally
  2. Put/Call ratio spiked
  3. Short term interest rates are still collapsing
  4. Breadth made a quick recovery
  5. SKEW remains depressed despite the stock market’s rally
  6. VIX remains elevated despite the stock market’s rally

 

Sentiment

While AAII Bulls % (sentiment) did increase over the past week as the stock market rallied, it is still quite low.

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Here’s what happens next to the S&P 500 when the S&P is within -3% of a one year high, while AAII Bulls is below 27%

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The S&P is mostly bullish 3 months later.

Put/Call ratio is going up

The equity-only put/call ratio spiked over the past few days even though the S&P didn’t really fall.

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This doesn’t happen often. Most increases in the put/call ratio coincide with stock market declines.

Here’s what happens next to the S&P when the equity Put/Call ratio increases by more than 0.2 over the past 3 days while the S&P does not fall.

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The S&P’s 1-4 week forward returns are more bearish than random, whereas the 3 month forward returns are mostly bullish.

3 month Treasury yields still falling

As the market expects a rate cut sometime in 2019, 3 month Treasury yields continue to fall. The decline is quite extreme, pushing the 3 month Treasury yield’s 14-day RSI below 20.

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Here’s what happens next to the S&P 500 when the 3 month Treasury yield’s 14-day RSI falls below 16

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The S&P still leans bullish over the next 3 months.

Here’s what the 3 month Treasury yield tends to do.

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