Stock market correction sparks pessimism

April 7, 2018

The stock market is like a video game for many people providing them with great entertainment until they start losing, repeatedly. With a serious correction unfolding, how a portfolio is handled can make a difference that lasts for years. Here's something you can use to build your knowledge and skill to manage the unfolding of corrections in the stock market. 


The chart below is not your heart rate monitor but it could be during moments of stock market anxiety. The put/call ratio is the relative volume of the purchases of equity puts to calls in the U.S. stock market. It can be a useful timing tool as spikes reveal extreme pessimism coinciding with declines in the stock market itself.


Notice how the put/call ratio is currently at .76. It's nowhere near the spike of .88 in early February during the stock market's one week "flash crash". But even then that level isn't as high as other times not only in the last five years, shown in this chart here, but throughout history. 


Historically, the put/call ratio spikes to over 1.00 and typically 1.20 before stocks actually bottom out. The last time it was this high was December 28th 2015 well before the February 8th 2016 low. 


There are other sentiment measures in the stock market including your own. Begin a process of establishing some kind of personal measure of your own sentiment and write it down for historical reference. 


Use this for timing


Our markets research has found the number of stocks trading above certain trend lines (moving averages) has usefulness for predicting trend changes in the stock market.  


During a correction the number drops, sharply, creating a low in stocks trading above the 50 day and/or the 200 day moving averages (m.a.). It reflects an increasing number of stocks entering down trends. 


From the chart below you can see the market is essentially retesting the low from early February 2018. What is particularly noteworthy is how it reflects the nature of corrections. If you were watching at the time, recall the recovery following the early February flash crash in the stock market. Many believed it was a short term event and the market was back to business again but here's what matters in stocks. Power persists! 


The rally through February and March featured some solid bullish action but cycles are relatively long in stocks. Big money, i.e. mutual funds and pension funds, can take many months, even years, to work through their process of buying or selling. 




You don't have to get burned by the stock market. Try this



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