Equity Put/call reaches 2nd highest level since April ‘20

Key Takeaways

  • Last Friday’s break of SPX 4450 turned trends back to negative in the short run, and while bounces look possible in the days ahead to over 4500, more strength over 4590 is going to be necessary before thinking US Equity markets are “out of the woods”
  • Gold, silver have advanced back up to areas of likely resistance given geopolitical tension
  • Equity Put/call ratio has now risen >1, a level often coinciding with Equity index Lows

The pullback took a turn for the worse last Friday with the break of 4450, representing both 2/22 lows along with 1/26 highs.  Thus, this break did result in some deterioration that followed through into Monday’s session.  Overall, February is proving challenging, and many sectors have not snapped back sufficiently to give conviction that a move back to new highs can occur.  Near-term, I’m expecting a snapback rally which should get back up above 4500.  However, until 4590 can be recouped, one can’t rule out additional weakness which might challenge if not break back below 4300 briefly in late February.   Bottom line, I expect that January 2022 lows should hold on further weakness, the broader momentum and breadth of US Stock indices remain under pressure.  Thus, I don’t think we can rule out further volatility in the next couple weeks, and “choppiness” looks likely before turning higher into March. 

Equity Put/call reaches 2nd highest level since April ‘20
Source: Trading View

EuroSTOXX and other international Stock indices remain under pressure

It’s important to reiterate that US weakness lately certainly isn’t just a US phenomenon, and it’s helpful to watch what’s going on in other country’s indices, as often there is some degree of correlation when making important highs and lows.

EuroSTOXX 50 daily charts show peaks to have occurred in November 2021.  Coincidentally, this also marked the peak in the German DAX, NASDAQ Composite, DJ Transportation Avg, the Russell 2000 along with Value Line Geometric Average. 

The recent churning in EuroSTOXX hasn’t been all that constructive, as prices have formed a massive consolidation pattern since last Spring.  (While some might view this negatively, it really cannot be seen this way until/unless prices violate 4000)   Bottom line, the key takeaway here is that other markets are also important to monitor and many have been going sideways and/or down since last November.  (India’s SENSEX and Japan’s TOPIX both peaked last Fall) Overall, holding this larger support trendline will be important to focus on, regardless if one has largely just a US focus, as many indices have begun to show evidence of slowing down.

Equity Put/call reaches 2nd highest level since April ‘20
Source:  Trading View

Gold, Silver bouncing towards highs of consolidation, but is this really a breakout?   Another key area to concentrate on is what’s happening with the precious metals.  It’s my view that much of the recent strength has happened specifically given geopolitical tension as Gold has been rising at the same time as Treasury yields and the US Dollar have been pushing higher.   This makes sense for the Dollar, as many emerging market currencies have been under pressure lately (but the EURUSD itself is the main reciprocal currency to watch carefully, making up over 60% of the DXY.) 

Gold, as shown below, remains in consolidation mode for the last year as part of an intermediate-term period of consolidation since the August 2020 peak.  Prices have advanced quickly in recent days back up to November 2021 peaks, but it still looks early to call a meaningful low for the Metal.  Given signs of US Dollar turning back higher along with yields, the ideal scenario would be weakness into the end of Q1 before turning up as interest rates start to rollover (Post FOMC)

Bottom line, Gold should encounter resistance between 1885-1917 and only if 1917 is exceeded, would it be right to project higher.  Important support lies at 1780 for Gold and can’t be broken without expecting a lengthier pullback.   GDX has similar resistance at 33.19 and then 35.  Any signs of Russia/Ukraine tension deescalating, from a non-technical view, likely results in Gold’s rally coming to an end, given US rates still pushing higher.

Equity Put/call reaches 2nd highest level since April ‘20
Source:  Trading View

Interestingly enough, we’ve seen some evidence of the Equity Put/call shooting higher in recent days and is now back over 1.   Monday’s 2/14 close represented the 2nd highest daily reading since Spring of 2020.  There looks to be concern building, whether it be because of FOMC’s timeline or geopolitical tension, but that’s been playing out specifically in the options market.  Overall, while not an immediate “buy” signal, this is a key part of sentiment that bears watching closely over the next couple weeks.  A persistently high Put/call ratio likely should result in a more substantial trading low in Equities being in place by late February in my view.

Equity Put/call reaches 2nd highest level since April ‘20
Source: Trading View
Disclosures (show)

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