Let's Break This Chop

The Market

It is now consensus that Fed Chair Powell’s speech at Jackson Hole, Wyoming on Friday will move the market. And we certainly hope so, because the chop-fest we’ve had this week is getting old.

I would love to see one more pop followed by another drop. But let’s talk about why I want to see the drop.

For that, we’ll begin with sentiment. The American Association of Individual Investors’ weekly survey showed very little change this week. There were a few more bulls and a few less bears, but it’s that four-week moving average of bears that I keep my eye on.

It is now 39%. That is the same level as we saw in May for this moving average. Next week we drop a reading of 24%, so unless the market tanks in a major way and the bears all of a sudden fall under 24%, I expect this four-week moving average to ratchet itself up one more time before peaking. And a peak in this moving average tends to be bullish for stocks. So in this case, down in the market is good, because it moves this sentiment indicator toward “oversold."

Then there is Wednesday’s extreme put/call ratio. Some have tried to rationalize it, something I prefer not to do. Could it be an outlier? Sure. But considering Thursday’s put/call ratio for the Volatility Index fell under 20%, I think it isn’t. As a reminder, a put/call ratio for the VIX under 20% tells me there is a large bet on the VIX going higher. A contrarian would think it should go lower and thus the market higher.

So unless we get several days in a row of readings under 20% for the VIX as we did in late July, I will take this as contrary for now. My expectation for the VIX is: We should see some back and forth. Thusday it was up.

The day’s equity put/call ratio was 74%, which is high, and that also tells us that folks are cautious. The 10-day moving average of the equity put/call ratio ticked up a smidge Thursday. The chart is shown below, but I ask you to look at it: It is rising from an elevated level, which says to me a move back down in the market would push this up toward “oversold” or “too bearish” territory in a hurry.

The other point of interest is that for the first time since around late July, Nasdaq was down on the day and there were more new highs than new lows. There were 307 new lows for Nasdaq last week at the lows. Thursday we saw 60. A move back down in stocks could, or should, see fewer new lows.

The bottom line is that it is possible to get positive divergences on a move back down. I also think if we moved back down in the next few weeks, we would not see folks so keen on bottom fishing. They would be fearful of the downside, which I would see as an opportunity.

New Ideas

I was asked about Square (SQ) not long ago and we discussed a bounce from that support around $60, which happened. It has now backed off the first resistance. I am now watching it closely to see if this tiny little pattern develops into a head-and-shoulders bottom (similar to the one I drew in for the iShares Russell 2000 Index (IWM) on Monday).

Today’s Indicator

The put/call ratio chart is below:

Q&A/Reader’s Feedback

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Kraft Heinz (KHC:Nasdaq) is trying to recover that earnings miss, so if it can get back into the $28-$29 area, it would be a gift. Keep in mind that stocks that are down so much heading into the fourth quarter tend to become candidates for tax-loss selling, and tend to languish in the fourth quarter.

If you ever hear anyone ask, is that a double top? The answer from me would always be that you don’t know it’s a double top until it breaks the valley between the two peaks. So I give you Exhibit A: Kronos Worldwide (KRO) , since that’s what a double top looks like. This $10-$10.50 area is the December low (not shown on the chart), and that double top measures to around $9-$9.50, so I suppose somewhere in the $9-$10 area the stock should find some support and rally. But here again, the general rule heading into the fourth quarter is if it’s a candidate for tax-loss selling, it’s a tough call to take a stab for more than a trade.

I was asked for a measured target on my old friend CVS (CVS) . That base measures to right around here ($61-$62) so I’d be inclined to use a tight trailing stop on it. I don’t want to get too anxious over it yet because of that looming gap overhead. I’d like to see it fill it but if I’m wrong, I don’t want to lose profits, thus the trailing stop.