Welcome to September… historically the weakest month of the year for the stock market.
And in anticipation of a market swoon, traders were jumping all over themselves to buy put options earlier this week. They’re hoping to profit from a decline in the stock market this month.
The only problem with that is the stock market rarely rewards the popular trade.
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 this chart of the CBOE 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 earlier this week.
Meaning, as the stock market declined to its lowest level of the month – and as many technical indicators stretched into oversold territory – traders were buying put options and betting on even more downside to come.
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Of course, anything can happen. Maybe those put buyers will be right and the financial markets will continue getting crushed in the short term.
But like I said, the stock market typically doesn’t reward the popular trade. It certainly hasn’t rewarded the put buyers the past few times this year when the CPC has popped above 1.20 (blue arrows).
Look at how the stock market behaved following big clusters of put-buying this year…
In each case, the stock market rose sharply higher just one week later.
The S&P 500 gained more than 200 points in late January. It gained 120 points in early May. And it gained about 250 points in mid-June.
If the market follows a similar path this time, then the S&P could trade near 4150-4200 in the early days of this month.
That doesn’t change the intermediate- or long-term pictures – which remain bearish. There’s still an excellent chance the S&P 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,
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Jeff Clark
Reader Mailbag
Do you think the market is due for another rally soon? Or do you think it will remain bearish?
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