First of all,
Here was my pre-hour thoughts:
I must say, today's price action was quite disappointed. The market had given up all the initial gains and then some. Not sure why but it could be due to the possible government shutdown next week.
Nevertheless, I'm still relatively bullish for now. I'm following many momentum indicators and most of them, if not all, are at the extreme oversold condition. One of them is the Put/Call ratio (CPC)
Take a look at this chart:
The CPC is a short-term contrary indicator. Roughly speaking
A reading below 0.8 (horizontal red line) shows extreme bullishness. This happens when folks are buying a lot more calls than puts.
A reading above 1.2 (horizontal blue line) shows extreme bearishness as speculators jump over each other to buy puts.
At the moment, the CPC jumped above 1.2 on Wednesday, which meant investors are extremely nervous and bearish and are buying puts aggressively to protect their portfolio. But the Market God never rewards popular opinions very much. On the contrary, it tends to punish those who follow the popularity in the short-term. In this case, when CPC is at or above 1.2 and nearly everyone expects further decline of stock prices, the market often turns around to shoot up.
Here’s a close-up view showing how the S&P 500 behaved following each of those times.
In each case, the stock market rallied almost immediately. The S&P 500 recovered much of what it lost in the decline that led to the spike in put option purchases to begin with.
We are at the same situation right now as the previous 3 times. If the market follows a similar path this time, which is what I'm expecting, then stocks should be higher over the next several days.
Baring a black swan flying out suddenly, I think the chance is high that we will see SPX popping up early next week. SPX 3350 is a valid target but we may even see 4400 before this dead cat bounce is over.
