Are Bulls Back In Charge? This Suggests That May Be The Case

The overarching theme over the past few days is everyone is looking for a rally, and not just the next few days, but into year end.

Options360 added a bullish position in SPY yesterday, so guess we agree. Though, we will probably be out of this trade within a few days if the market continues to carry higher. 

So far, earnings have been solid, but the bullishness is not based on fundamentals.

Rather, we’ve gotten a bunch of technical, sentiment, and other data points suggesting last Friday’s big green candle will lead to a bigger bounce. Whether it will be in the context of another bear market rally or ‘the bottom” remains to be seen. Below are just some of the recent developments we have seen:

• Divergence of the Relative Strength Index (RSI)
• Successful retest of the June low 
• Capitulation on CPI Thursday with a 5% move off intraday lows, consistent with other major lows
• October tends to be a bullish month, historically speaking
• Best 6 months of 4-yr cycle is coming up
• Consumer spending remains strong
• Earnings have been better-than-expected
• and finally, the Fed possibly beginning to adopt a less hawkish approach to inflation

First is the divergence of SPX and the RSI on the weekly time frame.

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Many of people have been pointing out this chart as these type of formation has only occurred on 3 other occasions, and each marked a major turning point to the upside.

But wait! If you go back a couple of months, you see a divergence that did not play out. Meaning our sample is now 3 out of 4.

I believe it is a valid bull signal, but let’s be sure to not cherry pick the data.

The current market trend is yet to be determined.

From a strictly technical analysis standpoint, SPY put in a massive reversal last Thursday, following the hot CPI print. 

You can see it undercut both the June and late September lows, but closed about 2.9% higher. Not only is the big candle a signal of a short term washout, but the fact that was essentially shrugged off suggests a major shift in sentiment.

Speaking of a sentiment shift, we see the put/call ratio has plummeted over the past few days. Remember, just two weeks ago retail traders bought a record number of puts, some $19 billion worth. Those are now what we call ‘tear ups’ as in they’re pretty much worthless.

We’ve briefly discussed how institutions and hedge funds have drastically reduced equity exposure over the past few months, which is one of the reasons the VIX hasn’t popped on sell-offs, however, that’s a topic for another day.

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But now, they’re rushing back in, and it’s not just stock and ETF purchases. The insiders and retail traders are now using longer term call options to establish bullish exposure. 

One of the most important things about the current environment is the condition of the consumer. This has lead to a lot of conflicting data coming from banks and credit card companies, as well as other general anecdotes.

Not to oversimplify, but it seems there is a separate reality for many households. While some households have spent much of their cash that was sitting in savings, higher-income cohorts, who own and have the ability to buy stocks, are still flush with liquid assets. A byproduct of this is that it will likely compound the problems the economy is facing in terms of spending, whether it be travel and leisure or real estate, and is likely to help keep inflation higher for a bit longer than we would hope.

Lastly, we come to seasonality. While I’m not a huge fan, I have to acknowledge that some data is significantly compelling and we sure certainly take note. October has a bad reputation due to some crashes that occurred in 1987, 1989, 2001 and 2008, however, these points in time all proved to be lows. 

The upshot; there are multiple pieces in place to suggest we could see a solid rally heading into the year end.

I’m excited to navigate this market and all its craziness to deliver solid profits for my Options360 members.

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