8,617 views|Oct 14, 2020,03:17pm EDT
The Stock Market’s Inevitable Big Plunge Approaches: How To Tell
Thanks to the actions of the Federal Reserve and the U.S. Treasury lots of money is finding its way into the stock market. This effort to mitigate the effects on the economy of coronavirus fears is unusually fierce and comes just before a Presidential election of significant uncertain consequences.
As mentioned in a previous Forbes.com Probabilities blog post, it’s become clear that investors seem highly focused on a handful of hot tech stocks — to the exclusion, mostly, of much of the rest of the market. Energy and financial sectors in particular are not participating in the fun this time around.
If you’re not concerned about where we are now, you should consider these metrics and what they might be saying.
The CBOE Equity put/call ratio looks like this:Recommended For You
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The ratio is hitting its lowest levels in more than 10 years. The chart is showing that calls (bets that equities will rise) are being purchased at much greater levels than puts (bets that equities will decline).
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Option traders have seldom been this confident that bullishness is warranted. From the standpoint of contrarian sentiment analysis, it’s not what you want to see, typically, if you own stocks. In fact, the opposite would be much better.
The percentage of New York Stock Exchange stocks above their 20-day moving average:
Although the NASDAQ-100 is back near the early September all-time highs, this wider view of all NYSE stocks shows a divergence. While it hit the typically-reached peak of 85 in September, this time around it’s only able to make it back to just under 70.
Fewer stocks are making it above their 20-day exponential moving average. This speaks to the “just buy me those 5 or 6 big tech names and skip the rest” theme that’s gripped the market.
Point and figure bullish per cent of the NYA. What I like about using this metric is that so few Wall Street MBA’s follow it anymore. Hence, it’s likely to provide useful un-looked at information.
Simple background: the p-n-f method quickly identifies a chart as either “bullish” or “bearish” based on price action. This “bullish per cent” tracks the percentage of stocks now displaying “bullish” patterns.
Month to month, since 2009, the peak bullish percent of all equities traded on the New York Stock Exchange is lower and lower. That is, each time the market has rallied in price, the number of stocks considered “bullish” in the point-and-figure method has diminished.
This is likely the effect of big money making its way into a narrower and narrower group of hot tech stocks — thus, it tends to confirm the “NYSE 20% above moving average” metric just above.
The stock market is capable of sudden, unexpected movement up or down at anytime. These are just potential guides based on years of experience. Unfortunately, nothing is guaranteed.
I do not hold positions in these investments. No recommendations are made one way or the other. If you’re an investor, you’d want to look much deeper into each of these situations. You can lose money trading or investing in stocks and other instruments. Always do your own independent research, due diligence and seek professional advice from a licensed investment advisor.