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We are finally seeing the major market indicators at levels that would justify moderate optimism, but as we’ve seen last January, when the same indicators were at comparable levels, the market rose a little and then made new lows.

The ratio of the S&P 500 to its 50-day moving average is currently bouncing off extreme lows, not unlike the percentage of S&P 500 stocks above their 50-day moving average. Generally, this scenario makes market rises more likely.

The 10-day moving averages of the equity put/call ratio and the VIX are at January levels, which are not the highest we’ve seen this year. So, unless we’ve turned a corner on market sentiment, we may yet see higher levels of fear and corresponding market declines.

The forces of mean reversion, market breadth and options activity indicate that we can cautiously expect further rises, but not dismiss the possibility of another leg down over the coming weeks. Such a decline should be welcome, as it would herald a stronger market rally.

Mean Reversion, Breadth and Sentiment

Comments (3)

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1. t said:
Tuesday, 22nd Jul 2008 at 4:16 pm

Dear Mo,

I really enjoyed reading your commentary—straight forward and accurate. Please keep up great work to guide us through the market. May I request that you write more often whenever it’s possible so that I can have a better picture on the market? I checked your site every single day. Thank you for your terrific work!


2. Mo Shaarani said:
Wednesday, 23rd Jul 2008 at 7:49 am

Thank you T. It hasn’t been easy keeping up with the smaller market movements lately, that’s why I’ve limited my posting to multi-week indicator setups. I’ll do my best to post on interesting shorter-term signals whenever possible. Thanks again and good luck with your trading.

3. T said:
Thursday, 24th Jul 2008 at 11:57 am

Hi Mo, Thank you for your quick response. The S & P has gone down more than 20% on 07-09(1244.69) on the closing basis. Are we “officially” enter (return?) into bear market? I expect the market is going down lots more except for some strong countertrend rallies. I could not agree with you more that it will have one more leg down before another good rally. Right now , even with a 7.56 % advance(S & P) as of yesterday, the bearish% of Investor’s Intelligence is at 49.4. Is it (bearish %) at the very high end historically? Should that alone act as a solid support for another rally after a short term pull back? Thank you and have a great day!


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