Continued Skepticism in Face of Powerful Rally
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Bernie Schaeffer Schaeffers Research.com |
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The following is a reprint of the market commentary from the November edition of the Option Advisor, published on Oct. 22. Prices and the chart are as of the close on Oct. 22. For more information or to subscribe to the Option Advisor, click here.
You may be familiar with the work of our Senior Quantitative Analyst Rocky White through his intriguing market studies in our weekly Monday Morning Outlook or his "Idea Lab" articles in each issue of our SENTIMENT magazine. This afternoon, Rocky updated and assessed our long-term market indicators in an internal email to our traders and analysts and I'd like to take this opportunity to share some highlights of his report with you.
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Rocky summarizes the weight of the evidence from our long-term indicators as follows: "The long-term indicators have a strong bullish bias. The long-term technical indicators (RSI, MACD and Stochastics) have all given official buy signals. Also, the S&P 500 Index has crossed above the potential resistance of the 80-week moving average. The S&P's 50-day buy-to-open (BTO) put/call ratio is heading upward, implying that money is flowing into the market. Despite the strong market over the last several months, we have seen plenty of bearish magazine covers, especially from non-financial publications, and in various articles."
I found Rocky's comment about the takeout of the 80-week moving average to be particularly interesting and particularly significant. The 80-week trendline equates to a 20-month moving average, and I was recently alerted to the fact that a number of bearish technicians had been hanging their hats on the fact that, as of about a month ago, the 2009 rally had not propelled the S&P above its 20-month level. Note from the accompanying chart how the 20-month supported the S&P throughout the bull market of the 1990s, was then broken in November 2000 ahead of a sharp two-year market plunge, was taken out in June 2003, supported the entire bull run into 2007, and was then broken again in January 2008 to serve as a perfect precursor of the 2008-2009 bear market. So the fact we've taken out the 20-month moving average this month has got to be very encouraging from a technical perspective, particularly if this holds on a monthly closing basis by a week from tomorrow.
Rocky's comments on the "buy-to-open put/call ratio" for the S&P are more complex to explain, but I'd like to take a shot at it for you because of its importance to the bullish case. Basically, we've studied the data feed from the Chicago Board Options Exchange (CBOE) for "buy to open" (BTO) transactions on their S&P 500 index options, which means opening transactions that are initiated by option buyers. And we've found that increases in S&P BTO put activity are highly correlated with market rallies, while decreases in this BTO put activity correlate with market declines.
Our interpretation is that BTO activity in S&P puts is driven by those who are accumulating long positions in the market and who are using S&P puts as a way to hedge their downside exposure. So in this sense, increasing S&P BTO put activity is an indication that stocks are under accumulation. And note from the accompanying chart from Rocky's report that, according to the S&P BTO P/C ratio (black line), the market began to be accumulated during the first quarter of this year as it was bottoming. There was some hesitation in this accumulation in the third quarter, but it has now resumed, with ongoing bullish implications for the market.
Finally, amidst this favorable combination of technicals and money flows, we have ongoing skeptical (and, in many cases, outright bearish) sentiment. Rocky cites bearish magazine cover stories, and one in particular worth mentioning is the cover piece in the Oct. 19, 2009 issue of Time – "Why it's time to retire the 401(k)" – which refers to the 401(k) as a "lousy idea" and a "financial flop." As I've said endlessly in this space, the continued skepticism in the face of this powerful market rally (in this case, the outright loathing of a stock market-based retirement concept that had been almost universally accepted as gospel as recently as a few years ago) has ongoing bullish implications, as it's a strong indication that there is still a substantial pool of sideline money that can power this market even higher.
Bernie Schaeffer will be available to take your questions until Sunday, November 15. Please use the form below to submit your questions.
Bernie Schaeffer:
• Developed Expectational Analysis®, a proprietary, three-tiered method of options analysis combining technical and fundamental studies with the analysis of investor sentiment.
Publisher
• In 1981, Bernie launched the newsletter, Bernie Schaeffer’s Option Advisor. Serving as senior editor since inception, Bernie has led the Option Advisor to become the nation’s leading options newsletter. Features: market commentary, specific trade recommendations, and trading strategy.
• Launched SchaeffersResearch.com, in 1997. A four-time winner of Forbes “Best of the Web” award, the website has also received positive mention in Barron’s, AAII and The Wall Street Journal Guide to Online Investing - “An independent options site that is one of the best for providing primers for both novice and advanced investors.” Features tools, quotes, data, commentary, and education.
• 10 Days to Successful Options TradingSM – This multi-media home study program teaches options basics. Learn fundamental strategies with hands-on application exercises and examples.
Author
• The Option Advisor: Wealth-Building Techniques Using Equity and Index Options (1997)
• New Thinking in Technical Analysis: Trading Models from the Masters – The industry has viewed Bernie’s Expectational Analysis® methodology as a groundbreaking approach to trading. Proof of this came with the publication of this new book by Bloomberg Press. One of twelve authors, Bernie was honored to be chosen from hundreds of market analysts to explain his methodology.
• Writes a monthly options column for Bloomberg Personal Finance magazine.
• Multexinvestor.com regularly calls on Bernie to contribute to their “Analyst Corner.”
Awards and Recognition
• Three time winner of The Wall Street Journal stock picking contest.
• Ranks fifth among market timers tracked by Timer Digest for the past decade.
• Dick Davis Hall of Fame inductee for his bearish posture ahead of the 1987 crash.
• He is known for successfully maintaining a bullish market posture throughout the 1990s.
• The Market Technician’s Association (MTA) awarded Bernie “Best of the Best” in 1997 in the field of Sentiment/Psychological Analysis.
• Bernie is regularly featured on investment chats on Yahoo! Finance.
• Bernie’s views on the stock market and the economy are regularly quoted in The Wall Street Journal, The New York Times, BusinessWeek, Investor’s Business Daily, and USA Today.
• Both Barron’s and The New York Times have featured Bernie in “Question & Answer” interviews.
• Recognized as a CNBC “Market Maven.”
• Appears regularly on national financial broadcasts such as CNBC, CNN, Bloomberg Television, the Nightly Business Report, Wall Street Week with Fortune and Fox News. Also serves as a guest host on CNNfn.
• Frequently invited to speak at national investment conferences and seminars.
• Regularly sits on Options Industry Council panels around the country.
• One of 50 market strategists appearing in BusinessWeek’s 2001 market forecast.
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