The midterm elections are clouding the market’s outlook on Tuesday, but one technician sees a bullish signal hiding in the charts.
“Looking at the put/call ratio, you’re looking at very high levels of pessimism,” Ari Wald, head of technical analysis at Oppenheimer, said Monday on CNBC’s “Trading Nation.” “What that put/call ratio does is it’s looking at the percentage of put buying versus call buying. Typically when there’s a lot of put buying it’s an indication of fear in the market, investors and traders taking on downside protection.”
Higher put buying typically suggests investors expect the value of the market or a specific stock to fall. A spike in investor puts could mean fear has overtaken the market, which often correlates with market lows and a subsequent “reflex rally,” said Wald.
“That put-call ratio specifically [is] showing the most pessimism in the market since the November 2016 U.S. election,” he added. “We don’t think now is the time to change positions. I think you get that rebound rally into year-end.”
From Election Day on Nov. 8, 2016, through to the end of that year, the S&P 500 rallied nearly 5 percent.
Investor worries over the U.S.-China trade war and doubts over peak earnings and economic growth have pushed stocks sharply lower in recent weeks. The S&P 500 has fallen more than 6 percent from its all-time high set in late September.
Boris Schlossberg, managing director of FX strategy at BK Asset Management, said it is possible for “one last hurrah rally” this year, but tighter monetary policy from global central banks puts the long-term bull market in doubt.
“Money is no longer easy, credit is no longer easy, I think that correlation between easy credit from central banks and the equity market has been very strong,” he said Monday on “Trading Nation.”
A bond market under pressure is also a concern for Schlossberg.
“Bonds no longer offer a negative correlation to stocks. In other words, bonds can fall just the same way that stocks do. There is no safe haven to hide,” he said. “When the correction comes for real, it’s going to be much more vicious and much stronger than anybody fears.”
Bonds often act as a safe haven for investors worried about a falling stock market. Bond prices and yields move inversely. The yield on the 10-year note went as high as 3.21 percent on Tuesday, while the 2-year Treasury yield increased to its highest level since 2008.