We’re only a few days into the month. But, so far, September is proving to be as treacherous as advertised.
The S&P 500 opened yesterday near 4440 – down 90 points from last Friday’s high. That’s a 2% loss in just three trading days.
And, it’s only the start. If this September plays out anything like it has in previous years, then the stock market has lower to go.
But, it won’t be a straight shot lower. The Market Gods won’t make it that easy for the bears.
Instead, whenever it looks “obvious” that the stock market is headed lower, we’re likely to see plenty of sharp one- and two-day rallies that destroy the bears’ short positions and keep the bulls forever hopeful.
We’re probably due for one of those sharp rallies right now.
Take a look at this chart of the CBOE Options Total put/call ratio (CPC)…
The CPC is a short-term contrary indicator. It compares the volume in call options to the volume in put options.
A reading below 0.80 (horizontal red line) shows extreme bullishness. This happens when folks are buying a lot more calls than puts. A reading above 1.20 (blue line) shows extreme bearishness as speculators jump over each other to buy puts.
The CPC jumped above 1.20 on Wednesday.
That means as the stock market declined hard to start the month, traders were buying put options and betting on even more downside to come.
But, in the short-term the market typically doesn’t reward the popular trade.
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So with everybody buying put options, the market is more likely to rally in the coming days – just to shake traders out of their bearish positions – before it heads lower later in the month.
Look at how the stock market behaved following the three previous times the CPC popped above 1.20 this year…
In each case, the stock market rose sharply higher just one week later.
If the market follows a similar path this time, then the S&P 500 could recover much of what it lost this week over the next few days.
That doesn’t change the intermediate picture – which remains bearish. There’s still an excellent chance the S&P 500 will finish September below its starting point.
But it’s likely the stock market will rally in the short term and shake out a lot of the bearish traders first, before it heads lower again.
Best regards and good trading,
Jeff Clark
READER MAILBAG
Are you looking forward to a rally?
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