It was my view a few weeks ago that a rally in oil that catalyst that would take the stock market down. I was clearly only half right in that assessment. Oil has kept sliding, and the market has slid right along with it. It appears that the market no longer cares about how much oil prices come down. In the near term, the market appears to be oversold. We saw some minor fear and panic out there when, during Tuesday's decline, the CBOE's Equity put/call ratio surged to 99%. That means there was almost one put being bought for every call. We did not see the Equity put/call ratio get this high in this past July's decline, but we did see it get there a few months before in the March decline. In the following chart, you can see that Point A was the August 2007 low. Point B shows the November 2007 low (not a good low at all). Point C is the January 2008 low, and Point D is the March 2008 low. Point E is where we stand as of September 9, 2008.
Now when we look at the Equity put/call ratio on a more intermediate-term basis at those same dates, we see a different picture. Below you can see a chart of the same indicator (equity put/call ratio) plotted on a 30-day moving average. When it peaks, I think we tend to get a market low. (In other words, too many high readings may lead to a high moving average, which may mean too much fear in the market. A contrarian view says too much fear leads to a rally.) In the following chart, Point A is the August 2007 low. Point B is the November 2007 low. Point C is the January 2008 low (notice how on the chart it is not a peak in the indicator). Point D is the March 2008 low. Point E is the July low. And then see where we are now: more like where we were at the January low, which was a low that lasted about a week.
In late August 2008, I showed the 30-day moving average of the advance-decline line, which is an indicator I use to determine when the market is overbought or oversold on an intermediate-term basis. At the time, I noted that it had reached an overbought reading during the final week of August. In my review of the more current chart, I currently do not have a good sense of when the market might be oversold, except to say I believe sometime in October. Therefore, I expect we will get rallies that are short-term in nature, but I do not yet see a low in the market that is going to give us a lift that lasts at least a few weeks or more.
What I think has been going on, and probably will continue to occur in the market, is that we will get group rotation. The past few weeks have been about selling technology and commodity stocks and buying financial stocks. I expect financial stocks to take a back seat shortly while we get an oversold rally in technology stocks and commodity names. Rather than giving us a lift that is all-encompassing, this sector rotation could mean that there is only so much money to go around, so it jumps from group to group. I believe that this phase will pass eventually. And when it does, I expect we'll see it in the indicators I follow. Until then, trade carefully.