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.