DXY and SP500-Put/Call Ratio May Indicate a Slow-down Of Current Trends
Dec 09 2020
As we all know the stock market has recovered very sharply and fast since March when we saw a strong drop following coronavirus lockdowns. The monetary policy has quickly changed and caused a rebound on financial assets after QE, stimulus packages, and lower rates. Stock indexes are higher, some even beyond March levels even though COVID is not anywhere near the end; in fact, we see more and more lockdowns and restrictions happening globally each day. It’s a clear evidence that QE is driving the markets and not real situation of the economy. But we have to realize that stock market is not an economy; stock prices are driven by supply and demand, and looks like more money printing obviously means more buying power.
I think that stock market is good indicator for overall market sentiment, and currently we see more and more investors trying to jump on the train despite prices printing new all-time high. On put/call index ratio we can see that investors are buying a lot of call as they believe that prices will be higher in the future. When calls move to extreme then it usually means the opposite as we know that market moves from pessimism to optimism and vice-versa. So if we respect past shift in trends on the S&P500 due to PUT/CALL ratio extremes then we shall also be aware of reversal now. I think there can be a risk-off, maybe in 2021. It can be only temporary turn or pullback before we go even higher, but I think that it will be much better opportunity to look for investments when PUT/CALL will be at the other side of the extreme.
We know that when there is risk-off the cash is king, so normally the USD will rise, which some may not agree because of money printing that drives down the value of the money. However, I believe there will be pullback even if dollar is going to crash, and this pullback may not be far away if we consider that DXY/SP500 ratio is seen in a fifth wave of a drop from March high. Based on Elliott Wave theory, the market is in final leg of current bearish development so next reaction is a contract-rend, normally in minimum three legs. And this goes perfectly with the PUT/CAL ratio view above.
The reason why people move into cash during the stock market sell-off is because of fear, they feel much better and safer with “cash in hand” rather than invested in some stocks during volatile and uncertain times. However, some will look to hide in metals or bonds but these requires patience. I think Gold is very interesting from the fundamental perspective, but when looking at the price and upward potential I really love Silver. TLT is also one option but there have been times when even bonds and metals fell “during stock market shock” but then quickly stabilized. The TLT is looking quite interesting while it trades above the trendline support, but falling trendline shall be broken to confirm the resumption of an uptrend.
Silver has a support here at 21/19 where current pullback can come to an end.
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All the best.
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